MorningWord 12/23/13: $AAPL Was a Crouching Tiger in 2013, Will 2014 Be the Year of the Hidden Dragon?

by Dan December 23, 2013 9:28 am • Commentary

On what was likely to be a slow news night in what was likely to be a quiet week of trading, the Twittersphere (and I suppose other ‘spheres) lit up like a Christmas tree with news that AAPL finally inked their highly anticipated but remarkably allusive deal (here) to sell the iPhone to China Mobile’s (CHL) 760 million wireless subscribers.  AAPL is up 3% in the pre-market, approaching the previous highs made after the WSJ’s report of an imminent deal in late Nov with CHL, which sent the shares up nearly 10% in a straight-line.

On Friday we made a near term bullish bet in AAPL (New Trade – $AAPL Picking).  While the stock appeared to be pinned to $550 on options expiration, we felt that could be a sort of line in the sand for the balance of the year. We were:

inclined to think that where there is smoke there is fire and that deal (CHL distribution) will be in place soon…..IN the very near term I want to make a defined risk bullish bet that AAPL holds current levels over the coming weeks and closes slightly above.  I want to look to short premium trades over the holidays as I expect a quieter trading environment coupled with two and half days off for Christmas and New Year’s day.

For those who agreed with the thesis, or saw me detail the idea on Options Action on Friday I would not be chasing the stock up 3% this morning.  Not because I don’t think the news is important, but because the news was highly anticipated.  Make no mistake, AAPL’s official release of iPhone to CHL subs will likely be the most important endeavor the company is involved with in 2014.  Likely far more important than other plans, such as the initial roll out of some sort of wearable computer like a watch that will at best be low single digits billion revenue business for them after 12 months.

For AAPL options traders/ investors, January will be an interesting month as the Jan 17th CHL launch of the iPhone corresponds with January expiration, and the company will likely report their fiscal Q1 on Jan 23rd, which falls in Feb expiration.  Why is this important? Well, Jan options would most likely be trading far cheaper to Feb as the latter captures the earnings event (they closed Friday about 4 vol points lower than Feb), but Jan could now be interesting as investors get excited about the prospects for dramatic estimate increases resulting from phone sales in a new mass market.  This situation could set up very well for call calendars for those looking to finance the purchase of upside calls into the Q1 print.

As for what the launch will actually mean for AAPL’s forward estimates, I discussed in a post on Dec 5th in this space (MorningWord 12/5/13: $AAPL and the Ol’ Wink Wink, Nod), but here were some interesting projections from Forbes contributor Chuck Jones had a very thorough rundown on their website of what it could mean for units and earnings this morning (here), here are some of the highlights from his post:

China Mobile had 759 million users at the end of October and has been adding about 5 million additional users every month for the past 4 and a half years. It has 176 million using 3G technology (23% of its base) and has been adding almost 7 million a month over the past year.

Various analysts estimate that Apple has about a 6% to 7% share of the Chinese smartphone market. There have also been various reports that there are already between 25 million to 35 million iPhones that have been hacked to work on China Mobile’s network. While this shows there is demand for the iPhone it could limit the number of buyers in the first year if they bought it recently.

Overall I believe Apple could fairly easily sell 15 million iPhones in the first year. This would only be 8.5% of China Mobile’s 3G install base which is only slightly higher than the estimated 6% to 7% share that Apple has of the entire Chinese smartphone market. At 15 million iPhones with an ASP of $550 they would generate $8.3 billon in revenue and add 4.5% to Apple’s revenue growth in the first year.

Note that for every 5 million iPhones Apple would generate an $2.8 billion in revenue and $1.05 of EPS.