MorningWord 9/12/14: I Want the One With The Bigger GeeBees – $AAPL

by Dan September 12, 2014 9:55 am ‚ÄĘ Commentary

If you are like me (nuts), then your are dragging ass this morning because of your early morning e-commerce activities. A week from today I will be the proud recipient of a new shiny, but not sapphire ūüôĀ iPhone 6 Plus (horrible name) with 64 geebees. ¬†As Android users will tell us iPhone geeks, we have an insatiable demand for¬†new sizes and features that they have had for years. ¬†For Apple, year after year to cause this much anticipation, the company must actually make the BEST high-end smartphone experience (despite¬†lacking a few key innovations). They have an uncanny ability to make people like me who HATE the hype around the stock, but still get up in the middle of the night to order a new phone.¬† I would add this about my pre-order experience – it took me 35 minutes at three in the morning to finally buy the larger phone, but the 5.5 inch sold out in all colors and sizes very quickly. ¬†As of now, the 4.7 inch is available for pre-order in 64 gb in both silver and space grey. This seems in line with the rumor that the 5.5 phablet was going to be in short supply and probably had a good bit of pent up demand here in the U.S. due to doubling the current screen size.

I would also add that lots has been written about Apple’s delayed launch of the phone in China, a region that is a huge part of the company’s growth, and simultaneously where the phones are actually assembled by 1 million hardworking/underpaid workers. ¬†Most phone market observers, including Barron’s last September,¬†have noted the unusual reason for¬†Lenovo’s move into Android smartphones in China with large phone sizes:

Lenovo, which makes phones using Google’s Android operating system, has introduced a number of firsts that made it popular with Chinese carriers. For example, it was the initial manufacturer to pitch smartphones at women. Apparently, Chinese women prefer big phones, which make their faces look smaller and “more beautiful (emphasis¬†mine)

So here are my take-aways for Apple as we all try to guess what all of the iPhone pre-order chatter means.  I suspect it means nothing.  The iPhone Plus probably goes as planned, good demand and tight supply with lead times now 3-4 weeks.  The China delay also creates a good deal of pent up demand for the larger phones for the next few months after the rush in the U.S. and Europe ends.

The 4.7 iPhone is still in supply. So did they make enough to meet initial demand?  I would suspect that it would be a massive marketing let down if they kept the pre-order open as long as there was demand and next Friday morning there were NOT lines at stores.  So I would expect the pre-order to end quickly whether they sell out of the allotment or not.

And how about the effect of the fairly aggressive trade in programs that all of the carriers, many retailers and Apple itself are conducting?  What is the effect on Apple margins? (I will be looking for some good research on this as last year was the first year that Apple itself participated).

All in all, it was a frustrating experience, knowing that if I wanted a 5.5 inch and did not want to wait in a line next Friday, I had to get up at 3am. ¬†And at 3am, Apple’s server was crashed for 35 minutes, Twitter almost exploded (can’t wait for the Samsung commercial depicting this).

As for the stock, you guys know where I stand (MorningWord 9/10/14: $AAPL Watch Out Below?).  I think a healthy 10% correction would be a very nice long entry at or around near term technical support at $90. (If you believe that there is a run into Watch release in the new year and additional service offerings (overhaul of iTunes/Beats) that could drive excitement.)

As for the options, I would make one observation as we included in this morning’s Notable Options Activity post:

while implied volatility (the price of options) on a near dated basis have come in fairly hard since the iPhone event Tuesday, prices still remain elevated, as investors will be looking for the standard update of first weekend sales following next Friday’s Sept 19th launch.  The chart below of 1yr 30 day at the money IV (blue) vs actual volatility in the stock (white) shows the decline in prices, and the increase in movement.  If those two were to converge options prices could be perceived as reasonably priced, but for now short premium strategies like overwriting and range trades probably make the most sense:

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A lot of premium has come out of AAPL options this week, and a $100 pin would be an appropriate way to end a week that was so highly anticipated by traders all around the world.