Apple (NASDAQ:AAPL) stock was rising Friday morning as investors were buying stock in the iPhone maker after it posted solid earnings that topped estimates.
The numbers were decent, as revenue rose 5% year-over-year to $85.8 billion — a record for the fiscal third quarter ended June 30. It was also better than the $84.4 billion in revenue that analysts had projected.
Net income jumped 8% to $21.5 billion, or $1.40 per share, which was also above estimates of $1.35 per share.
However, inside the numbers, there were some concerns, as well as some surprises. The question for investors is: Is Apple stock a buy after Q3 earnings?
iPhone sales down
One of the primary takeaways from Apple’s fiscal Q3 earnings is that iPhone sales were down year-over-year. The iPhone is by far the largest revenue driver for Apple, generating $39.3 billion in revenue in the quarter. That beat estimates but it was down 1% from the same quarter a year ago.
iPhone sales have been lagging, down about 10% over the past year. The June quarter numbers were about in line with what the company expected, as it called for low-single-digit revenue gains in the quarter.
Lower sales may be attributed to several factors, ranging from the economy to the cost to the lack of anything new to warrant an upgrade.
But at Apple’s Worldwide Developers Conference in June, Apple CEO Tim Cook outlined all of the new features in the new iOS 18 operating system and the iPhone 16, both of which will come out this fall.
“During the quarter, we were excited to announce incredible updates to our software platforms at our Worldwide Developers Conference, including Apple Intelligence, a breakthrough personal intelligence system that puts powerful, private generative AI models at the core of iPhone, iPad, and Mac,” Cook said of the upgrades.
China sales drop, Services revenue up
Another factor causing iPhone sales to drop is the decrease in sales in China. In the third quarter, sales in China were down 7% year-over-year to $14.7 billion. As this is Apple’s third biggest market after the U.S. and Europe, the downward trend is a concern.
The $14.7 billion in sales in China were below estimates of $15.2 billion, but Cook, on the earnings call, said recent price discounts in the region have been effective in boosting iPhone 15 sales.
One of the bright spots for Apple has been its growth in Services revenue, which includes revenue from Apple TV, iTunes, apps, and other subscriptions.
In the third quarter, Apple did a record $24.2 billion in Services revenue, up 14% year-over-year. This has been a growing segment for Apple, accounting for about 28% of total sales. That is up from 25% in the same quarter a year ago and 23% two years ago this quarter. The Q3 Services revenue results were better than analysts had predicted.
Is Apple stock a buy?
Apple does not typically provide formal quantitative guidance, but it does sometimes give estimates on earnings calls with analysts. On the Q3 earnings call, officials said they expect similar revenue growth in Q3, both overall and within Services.
However, toward the end of the quarter in mid-September, the new iPhone 16, with the Apple Intelligence AI upgrades, among others, will roll out. Investors will be watching this closely to see if this is the product that can move the needle again for iPhone sales.
Apple stock is up about 16% year-to-date, including a 2% gain on Friday. Analysts gave Apple stock mostly moderate price target increases post-earnings, based largely on the earnings beat and perhaps a bump after the new iPhone and operating system launch.
Currently it has a median price target of $222 per share. However, I suspect that median target will tick up slightly based on this week’s upgrades.
The valuation has remained fairly steady, as Apple stock is trading at 34 times earnings, up slightly from 31 at the start of the year. I think the valuation is still a bit too high. And with there likely being no catalyst until September, and a volatile market that seems to be in correction mode for overpriced big tech stocks, it might be wise to monitor Apple stock until closer to the iPhone launch, looking for a better entry point to buy.