$AAPL Fiscal Q2 Earnings Preview

by Dan April 23, 2013 7:23 am • Commentary
AAPL Fiscal Q2 Earnings Preview

Event:  AAPL reports Q2 earning tonight after the close.  The options market is implying about a 7%*which is inline to the 4 qtr average move of about 7%.
* the Apil 26th 400 straddle is offered at about $28, if you were to buy that you need a $28 move in either direction to make money on Friday’s expiration, or about 7%).

Sentiment:  Despite more than a half dozen ratings downgrades in the last few months, Wall Street analysts remain overwhelmingly positive on the stock with 52 Buys, 9 Holds and only 3 Sells with an average 12 month price target of about $576 (or almost 45% higher than current levels).  Short interest nears 52 week highs, but only at about 2% of the float.

Fundamentals:  There is obviously a raging debate among bulls and bears on this one as to the potential for future growth and innovation.  My sense is that AAPL will have its share of fits and starts as a stock over the coming qtrs/years as the investor base shifts from growth to value, but the likelihood that AAPL sees new highs, or even trades with a 6 handle anytime soon is remote.  The fever has broken, the bubble has burst and the sort of shareholder shift that is taking place will keep a cap on fabulous gains in the near future.  Business Insider’s Henry Blodget succinctly lad out the bull/bear debate last week (here), bullets here:


  • The stock is cheap. ($366 bil market cap, close to $150 bil in cash, no debt, generating about $40 bil in cash a year, with cash balance equaling its trailing 12 month sales)
  • We are nearing the end of the new-product blackout that began last fall. (In relatively short order, excitement should begin to build about the iPhone 5S, the new iPad Mini, and other product refreshes)
  • While Apple’s management team without Steve Jobs in charge is unproven, it’s not stupid. Almost all of the folks who produced and sold Apple’s great products over the past five years are still on the team.
  • Apple appears to be working on a cheaper iPhone, which suggests it is finally willing to trade profit margin for growth. This is critical for the company’s long-term survival….
  • A disastrous first quarter and second-quarter outlook should radically reduce Wall Street’s expectations for Apple — thus setting the bar lower. This will make it easier for Apple to positively surprise investors in the future.
  • It is still possible that Apple is working on a revolutionary new product like a TV or smartwatch that will suddenly get people jazzed about the company again.
  • Most importantly, Apple is still well-positioned strategically, and it still makes excellent products.

I would add that late last year when bulls defended the stock on its initial leg of its descent from the all time highs, there were 3 catalysts for the first half of Q3 that would buoy the stock:

1.  Broader cash distribution plan

2.  New Blockbuster product (AppleTV)

3. iPhone distribution deal with China Mobile (they have 700 million subscribers).

At the moment, TV and China Mobile feel like pipe dreams, and clearly 2nd half “catalysts” while a broader cash distribution plan than their existing modest dividend and share repurchase program seems like the one thing that for the moment could stop the bloodletting as investors do not expect any material product info on earnings annoucements.


  • The company’s growth has vanished: earnings are expected to shrink this year.
  • The company’s critical product, the iPhone, has lost its edge, and the product cycle that drove Apple’s mind-boggling profitability over the last several years (premium smartphone growth) is nearing its end.
  • Apple’s profit margin is dropping, as its main products get commoditized.
  • The CEO of the company is not a product visionary, and has not articulated a vision of where he wants to take Apple going forward.
  • Apple’s internal management may be in turmoil or at least in flux, and employees are reportedly more willing to leave than they have been before
  • No one knows if Apple has any truly great new products in the pipeline.
  • Apple has cash coming out of its ears, but no clue what do with it.
  • Lastly, Apple really has finally entered the “post-Steve Jobs” era, and it remains to be seen how successful the company’s next generation of leaders and products will be

I would add that when the postmortem of the early Tim Cook tenure as AAPL’s CEO is complete, many observers would suggest that the company’s decision to refresh almost all major product lines btwn Aug and Dec 2012 ended up being a massive execution blunder that caused shortages of important components and thus caused product launches with less than desired availability and created a future hole for a more staggered refresh schedule. For a stock that has spent the last 5 years driven by the next innovation and new iGadget on a fairly regular, but staggered 6 month period, investors are now left wondering if the company still has the ability to innovate at a time when their products seem less and less cutting edge and have to wait until the fall to make that assessment.

Technicals:  The stock has gotten very close to longer-term technical support around $360-$370, which is also close to the 200 week moving average:

AAPL 3 year weekly chart of AAPL, Courtesy of Bloomberg
AAPL 3 year weekly chart of AAPL, Courtesy of Bloomberg

Given how many months the stock traded in that area,  that area is by far the strongest support area AAPL has encountered on its many months of selling.  At the least, even if AAPL breaks that area of support (something I think is low probability), we don’t foresee AAPL declining much more from there in the short-term.  There is too much price memory in that area overall.  In terms of resistance, the 475-500 area should be tough to breach in the coming months based on all of the potential overhead supply.

On a longer-term basis, the 5 year weekly chart shows that AAPL has broken its multiyear uptrend in 2013:

AAPL 5 year weekly chart, Courtesy of Bloomberg
AAPL 5 year weekly chart, Courtesy of Bloomberg

Just one more confirmation that AAPL is unlikely to reclaim its previous heights anytime soon.

Volatility:   Implied Vol in AAPL is nearing 2 year highs, and at the highest it has been ahead of earnings at any point.  The only time implied vol was higher was due to macro concerns in the fall of 2011, when the VIX got all the way to 48.  This has occurred as realized vol has also moved higher, but 30 day realized vol in AAPL is only around 30, around the midpoint of its 2 year historical vol.  So option traders are obviously placing a ton of emphasis on tonight’s earnings report, and while the expected move is not larger than average, the implied move is larger than what it has been in quarters past (usually around 5%).

2 year Chart of AAPL 30 day IV, Courtesy of Bloomberg
2 year Chart of AAPL 30 day IV, Courtesy of Bloomberg


OUR VIEW:   Very simply put, we think the stock is setting up for a capitulation bottom. I even said it could be the “BUY OF THE CENTURY on the NEXT PUKE” last week on Fast Money. I am fairly certain most traders know what I mean, if the stock craters on news that was expected, we could see a set up for a V Reversal back towards LONG TERM SUPPORT, at a level that would match an approximate 50% peak to trough decline from the September Highs.  IN a week that saw Forbes.com blog posts suggesting that AAPL could be looking to replace CEO Tim Cook (here) and pretty funny story from The Onion titled “Weeping Tim Cook Spotted Screaming For Help At Steve Jobs’ Tombstone“, we could be nearing an intermediate sentiment bottom in the stock on a large volume sell off.

Readers of Risk Reversal are very well aware that we are not in the business of merely buying and selling stocks at certain levels, we look for ways to marry all of the inputs detailed above with our directional view and arrive at the best way to express that view with DEFINED RISK.  If AAPL’s Q2 earnings and Q3 guidance cause a massive gap in the stock on Wednesday morning, we will likely employ one of the strategies that we detailed on yesterday’s Webinar where we previewed AAPL’s earnings event (here).

We will be sure to post some trade structures that we like for Long Stock holders who are looking to possibly add yield to existing positions, or structures that make sense to risk manage holdings into what could be a potentially volatile event.  Stay Tuned.


Q2 Expectations:  From the Apple Orchard Blog (this guy @SammyWalrusIV has been good on AAPL):

AAPL 2Q13 Preview; Expect Ugly Guidance

Revenue: $41.1 billion (AAPL guidance: $41-43 billion/Consensus: $42.5 billion)

  • I expect Apple’s revenue to increase 5% year-over-year.

GM: 38.1%(AAPL guidance: 37.5-38.5%/Consensus: 38.5%)

  • Apple continues to feel margin pressure from its current product lineup. Management’s margin guidance is approximately 940 basis points less than the 47.4% margin reported in 2Q12.

EPS: $9.55 (Consensus: $10.07) 

  • I expect Apple to report a 22% yoy EPS decline. My $9.55 estimate is less than the Street’s $10.07 average.

Product Unit Sales and Commentary

Macs: 3.7 million (8% yoy decline)

  • Mac sales continue to slow as tablets and smartphones satisfy many consumers’ computing needs. I assume declines in both desktops and portables.

iPad: 15.5 million (31% yoy growth)

  • I expect Apple to report solid iPad sales for 2Q13. My iPad estimate assumes approximately 8-10 million iPad mini sales and approximately 1-2 million units added to channel inventory in order to meet management’s target range.

iPod: 6.1 million (20% yoy decline)

iPhone: 36.5 million (4% yoy growth)

  • With iPhone channel inventory already within management’s target range, I expect Apple to report a significant slowdown in iPhone unit growth (30-90% unit growth over the past four quarters vs. 4% in 2Q13) as the smartphone market matures. Verizon activated 4 million iPhones in 2Q13 and if Verizon represents a similar share of total iPhone sales during the quarter, my 36.5 million unit estimate may be too optimistic on the order of 20%. If iPhone sales are trending closer to 30 million units, I think Apple may resort to stuffing the channel by at least 1-2 million units, resulting in a bear case of approximately 31-32 million iPhones (resulting in EPS around $8.60).

Quick Note on Capital Management

Some observers are predicting Apple management may try to shift attention away from weak guidance on Tuesday by announcing its latest thoughts on capital management.  While anything is possible, I’m not convinced of that tactic’s effectiveness. Instead, Apple may be better suited to let the dust settle from the current earnings cycle before acting on its updated capital plan.  At the current trajectory, Apple may be in a position to announce a multi-year share buyback authorization representing up to 20% of outstanding shares. More importantly, management will probably have to address its $94 billion of offshore cash as Apple has “only” $43 billion of cash currently available for capital management.  A growing number of industry observers think raising debt is part of Apple’s solution to its offshore cash “problem”.  While there may be financial merit in raising debt in the current environment, such an action would mark a significant new chapter in Apple’s history

Bloomberg Preview By Beth Mellor


  •   2Q EPS est. $9.98 (range $9.16-$12; avg est. down 1.5% ove past four weeks)
  •   2Q rev. est. $42.3b (range $40.6b-$44.1b; avg est. down 1.2% over past four weeks)
  •   2Q gross margin est. 38.5% (range 37.6%-41%)
  •   3Q EPS est. $8.87 (range $7-$10.83; avg est. down 6% over past four weeks)
  •   3Q rev. est. $38.5b (range $33.5b-$43.3b; avg est. down 3.5%over past four weeks)
  •   3Q gross margin 38.8% (range 36.7%-42.5%)

 NOTE: Last qtr, AAPL said changing approach to guidance; will give range that reflects what co. “likely to achieve” instead of “conservative point estimate”


  •   2Q iPhone unit est. 35.4m (range 31.1m-40.5m, 13 ests.)
  •   2Q iPad unit est. 18.5m (range 16m-21m, 13 ests.)
  •   2Q Mac unit est. 4.1m (9 ests.)
  •   2Q iPod unit est. 6m (9 ests.)

* Guidance:
* 2Q likely to beat ests. which may “restore investor
interest,” JPMorgan (overweight) says; sees 3Q outlook
likely “conservative”
* AAPL may meet low end of 2Q rev. view although 3Q rev.
forecast likely to be “well below” consensus, as
checks indicate iPhone 5S availability in July “at
risk” and low-cost iPhone likely delayed until CY4Q:
Jefferies (hold)
* 3Q gross margin guidance key metric; may boost
confidence about impact of lower-priced iPhone, Morgan
Stanley (overweight)
* Capital plan:
* AAPL may package good news of a new capital plan with
the bad news of weak 2Q results, BTIG (buy) says; AAPL
will likely announce “meaningful dividend growth” and
“significant increase” in buybacks with earnings:
Mizuho (buy)
* AAPL cash announcement more likely a few weeks after
results; co. needs to return 50% of FCF on “ongoing”
basis to avoid disappointing investors: Bernstein
* AAPL may raise current quarterly dividend by 17% to
~$3.10 a share, according to Bloomberg BDVD forecast
* Other news:
* Also watch for update on AAPL’s efforts to find new head
of retail, any sign of potential return of Ron Johnson,
Telsey Advisory Group says
* NOTE: April 18, Verizon said it activated 4m iPhones in 1Q,
half of which were iPhone 5s
* Also watch Apple suppliers
* NOTE: April 16, AAPL supplier Cirrus Logic forecast 1Q
rev. below est., 4Q prelim. rev. missed