Event: AAPL will report their fiscal Q1 earnings tonight after the close. The options market is implying about a 5.5%* one day move, slightly higher than the 4 & 8 qtr avg of ~5% .
*The Jan 31st 550 Straddle with stock around $552 (the call + the put) is offered at about $31.50. If you bought this, you would need a $31.50 move in either direction by Friday Jan 3st at 4pm to break-even. With earnings coming tonight after the close, long weekly options to make money off of a move will become fairly challenged once the stock settles after the initial move.
Sentiment: Wall Street analysts remain very bullish on the stock with 45 Buys, 14 Holds and 4 Sells with an avg 12 month price target of ~$602 (this has moved up from $552, or about 9% since prior to their Q4 results in Oct).
Short interest sits at about 1.5% of the float, down from the 2% level 3 months ago, and at its lowest level since the fall of 2012. Its highest level in the past year was in the spring of 2013, around 4.5% of float.
Options Open Interest: Open interest in AAPL has historically been skewed to calls, and the current situation is no different. There are around 1.25m calls outstanding vs. about 750k puts. The 1 month average volume has also favored calls vs. puts by a ratio of about 1.65 to 1. Among weekly options, the Jan31st 560 and 570 calls are the only strikes with over 10k of open interest. The Feb22nd 600 calls and the Apr 600 calls are the only near-term strikes with over 20k of open interest. In Jan15, the 500 calls have over 30k of open interest.
Implied Vol Snapshot: Implied volatility in AAPL is in the low-30’s, which is actually on the low end of where it has normally been prior to an earnings event over the past 2 years (has been as low as 30 and as high as 45):
A big reason for the lower-than-normal level of implied volatility is that AAPL realized volatility has been quite low over the past 3 months, and the stock is smack dab in the middle of its 2 year range (of 385 to 705). Moreover, Icahn’s involvement and AAPL’s potential use of its cash bundle possibly puts a floor in the stock on the downside, which has also lowered implied volatility.
Price Action / Technicals: Our friend and illustrious technician Carter Worth of Oppenheimer highlighted the steady uptrend in AAPL shares since the June 28th low of around $389, which was a double bottom in retrospect (video here). That trend line is crucial support for the stock, which likely makes a move to the $500-$510 support area on a clean break after earnings:
On the upside, the high of the past year is the December high of around $575. More important resistance lies around the psychologically important $600 level, which has not been touched since the fall of 2012, shortly after AAPL stock topped out.
The expected range for AAPL stock on the earnings event, based on current options pricing, is in the $520-$580 range, which matches the short-term support and resistance areas quite well.
Q1 & Q2 Expectations:
Here is a nice consensus estimate roundup for AAPL’s EPS, Revenue & units by product by Philip Elmer-Dewitt, editor of the Apple 2.0 Blog on Fortune.com:
Estimates/Guidance From Bloomberg:
- 1Q EPS est. $14.07 (range $13.49-$15); avg. est. up 0.2% over past four weeks
- 1Q rev. est. $57.48b (range $55.93-$59.88b); avg. est. up 0.3% over past four weeks
- APPL forecast 1Q rev. $55b-$58b (Oct. 28)
- 1Q gross margin est. 37.3% (range 36.9%-37.9%)
- AAPL forecast 1Q gross margin 36.5%-37.5%
- 2Q EPS est. $10.93 (range $9.93-$12.54); avg. est. up 0.6% over past four weeks
- 2Q rev. est. $46.10b (range $43.15b-$49.68); avg. est. up 0.6% over past four weeks
- 2Q gross margin est. 37.3% (range 36%-39%)
Unit Breakdown:
- 1Q iPhone unit est. 55m
- iPhone ASP $607
- 1Q iPad unit est. 25m
- iPad ASP $447
- 1Q Mac unit est. 4.5m
- 1Q iPod unit est. 7.9m
Fundamentals:
Q1 was a bit of a whirlwind quarter for AAPL dominated by the dual release of 2 different (but pretty much the same) iPhones at the same time. Much of the debate in the investment community prior to release of the “low end ” iPhone 5c was what the impact of a higher mixed of lower margin phones would be on the financial model. Analysts only had to go back a year with the intro of the iPad Mini in fiscal 2013 Q1, which saw a down-tick in gross margins of 150 bps due to greater sales of the new device vs the high margin larger iPad. Aside from the debate around high-end /low-end phones, much of the worry was absorbed by the announcement that China Mobile would start selling both iPhones in January, and going forward the increase unit sales could help offset lower profitability.
Despite the stock’s lack of performance in the past year (basically sitting at the exact same spot this time last year), expectations on the product front have come down quite dramatically as the company has not introduced a new product category since the iPad back in April 2010. We think this is a good thing as investors get their arms around what should be a high single digit earnings grower as opposed to the 30, 40, 50% growth they had become accustomed to as the company was creating new product categories off of a much smaller revenue base.
OUR VIEW: It is our view that the stock in the low to mid $500s should find a good bit of support as a result of their product portfolio, buyback, balance sheet, activist involvement, increased geographic roll out and the likelihood of new products in 2014. It is also our view that it would take a fairly dramatic beat and raise to see the stock attempt to breach $600 in the very near term without a combination of estimate revisions, increased buyback and dividend and the intro of a new product category. We do not expect any commentary on the call tonight about new products or increase capital return, and therefore the focus will be the mix shift of iPhone both here and abroad, the impact on corporate margins and the roll out with China Mobile.
If the China Mobile launch got off to a sluggish start, then fiscal Q2 guidance could be challenged. If that is the case, we could see the stock trading down in line with the implied move of about 5% to $525/520, the level at which it consolidated back in October/November. If the company beats slightly and guides up do to a better launch and the guidance speaks to a better mix of higher margin iPhones and iPads, then the stock could likely test the previous highs from December at around $575, also in line with the implied move.
The main take-away though is that the stock appears to have found a bit of an equilibrium as far as expectations, and the next couple of catalysts after earnings will be the Feb 28th shareholder meeting and any sniff of new products.
On Friday we bought a Jan 31st /March 575 call calendar (here) playing for the later scenario. Stay tuned as we will post more thoughts in a Name That Trade post offering alternative trade ideas for those with differing views from our own.