AAPL is one of the worst performing stocks to start 2014, down more than 4% since the December 31st close after yesterday’s 1.3% decline. Even Carl Icahn’s tweets have had a diminishing impact – the stock is actually lower than where it was after his most recent tweet on AAPL on December 4th.
Smartphone manufacturers have reported weak 4th quarter results so far. Samsung and HTC are both down more than 7.5% in 2014 in less than 2 weeks. Fears of smartphone saturation among global consumers have been voiced for more than a year now. The overall market pie certainly seems to be stagnating.
AAPL still gets more than 1/2 of its profits from iPhone sales, but the company has shown some bright spots in other areas.
Dan discussed the fundamental backdrop for AAPL in his Morning Word post on Monday:
As it relates to AAPL though, a company that has not introduced a new category since the spring of 2010 with the iPad, I see tons of opportunities. And just like MP3 players, smartphones, netbooks and tablets existed before AAPL’s intro to the market, it didn’t take them long to redefine the respective categories. Last month in a letter to AAPL employees, CEO Tim Cook stated, “We have a lot to look forward to in 2014, including some big plans that we think customers are going to love.” Now this sounds like the usual CEO-speak, but with a potential proxy fight looming and a stock that, despite being up substantially from the 52 week lows, still sorely lags the broad market and sits 23% from the all time highs in Sept 2012, the company better hit on those big plans. With iPhone selling at China Mobile in the next couple weeks, the potential for AAPL to redefine the watch category, the deliverance of the long rumored TV and some sort of home server to connect anything with a transmitter could all be catalysts for a stock that long traded on product intros.
While investors are looking for a market-busting new product, AAPL is in fact gaining ground in other areas. From today’s WSJ:
Apple won about 8% of global business and government spending on computers and tablets in 2012, Forrester Research says, up from 1% in 2009. By 2015, Forrester estimates that figure will climb to 11%. The numbers exclude the iPhone, which may be the most widely purchased Apple product by corporate customers. It is often Apple’s gateway into a business.
…
Apple historically made little effort to sell to businesses. Under Chief Executive Tim Cook, however, Apple is quietly moving to appeal to corporate tech managers, by making it easier to link iPhones and iPads to corporate email systems, and to better protect corporate data. In the latest example, the new Mac operating system Mavericks includes enhanced security and data-encryption technology aimed at corporate customers. The efforts are magnified by the growing appeal of Apple products.
There are of course risks to this approach, as courting the corporations can lead to disenchantment among consumers. Nonetheless, the growth opportunity for AAPL in the enterprise segment is clearly attractive.
Looking at 4th quarter and 2014 calendar year earnings expectations, the bar is higher.
AAPL showed a year-over-year decline in EPS last year in every single quarter, while analysts have modeled in 12% growth in 2014. Consensus for the late January report is only for 2% growth, which looks achievable if holiday sales were better than competitors’ numbers so far.
However, the outlook for the year looks overly optimistic unless AAPL regenerates excitement in the brand. On the bullish side of the ledger, valuation is still cheap at 13.5x, though hard to see much multiple expansion for the $500 billion behemoth. In that vein, AAPL looks like a rangebound stock for the next few months, particularly given important support around $510:
[caption id="attachment_34624" align="alignnone" width="600"]
AAPL daily, Courtesy of Bloomberg[/caption]
While $500-$510 is obvious psychological support, the stock also has ample overhead supply from the price action in 2012. Looking longer-term, the $510-$590 range looks like an interesting area to target for a potential trade:
[caption id="attachment_34625" align="alignnone" width="580"]
AAPL weekly, Courtesy of Bloomberg[/caption]
Finally, AAPL implied volatility has inched higher as we approach the earnings date. 1 month and 2 month implied volatility are near the levels reached prior to the last 2 earnings reports:
[caption id="attachment_34626" align="alignnone" width="600"]
AAPL 30 day implied vol (red) and 60 day implied vol (yellow), Courtesy of LiveVolPro[/caption]
AAPL has only averaged 2.5% moves over the past 3 earnings reports. Of course, the upcoming earnings report is the most important of the year, and AAPL moved 12% on last year’s January report. That was a more uncertain period for AAPL’s business and the stock’s psychology, however.
All three of us have slightly different views (for the moment) on how we want to play so I will quickly lay them out (all hypothetical, we will arrive at something next week):
ENIS:
With a more stable psychology/investor base, and no expectations for a major surprise in either direction, the following trade structure looked interesting as a range trade into and after the earnings event:
Name That Trade: Buy the AAPL ($532) Feb22nd 510/550/590 Call Butterfly for $12.00
Break-evens on Feb22nd expiration:
Profits: btwn 522 and 578 make up to 28, with max gain of 28 at 550 on expiry.
Losses: losses of up to 12 btwn 510 & 522 and btwn 578 & 590 with max loss of 12.00 below 510 or above 590.
Trade Rationale:
This is a “sell the move” structure and looks to use recent consolidations to the downside and recent highs to the upside as its range. AAPL earnings moves have been fairly boring recently and this structure looks for that trend to continue. The risk reward of the structure isattractive, although as with any earnings play, the amount risked could be gone overnight on a big move in the stock.
DAN:
The stock’s decline from the China Mobile Euphoria in the last month makes me a little worried about trying to pick a bottom, but I suspect prior to earnings the stock will find its footing and possibly rally into the print. I like the idea of playing with a call calendar, selling the Jan 24th 550 call and buying the Jan 31st 550 call (earnings are Jan 27th).
Name That Trade: AAPL ($532) Buy Jan 24th / Jan 31st 550 call spread for about $7
Break-evens on Jan24th expiration:
-If the stock is below 550 then I own the Jan 31st 550 expiration calls for $7, at which point I would look to spread by selling a higher strike call and further reduce my break-even.
Trade Rationale:
-The problem with this trade is that i would be selling a 24 vol option to buy a 34 vol option that will most certainly come in very hard after the earnings the event. This trade is bullish for the earnings but it is not taking advantage of a vol differential, merely looking to finance the purchase of upside calls with short dated premium.
CC:
Name That Trade: Buy the AAPL ($532) Jan 24th 530/550/570 Call Butterfly for $5.00
Break-evens onJan 24th expiration:
Profits: between 535 and 565 make up to 15 with max gain of 15 at 550
Losses: btwn 535 and 530 lose up to 5 and btwn 565 and 570 lose up to 5, max loss of 5 below 530 and above 570
Trade Rationale:
I think most of the recent selling has been from traders and funds that got caught offsides on the China Mobile rumors and news and possibly own the stock at levels higher. I think the selling will stop at some point soon and we will likely see AAPL go back to or slightly above its 50 day moving average of 541 in the next 2 weeks into earnings. This structure risks very little to play for that bounce inot earnings with no risk into the event itself in which I have no idea what the reaction will be.