$AAPL Fiscal Q2 Earnings Preview

by Dan April 27, 2015 9:18 am • Commentary

Event:  Apple (AAPL) reports its fiscal Q2 results tonight after the close. The options market is implying about a 5% one day move (and weekly move of about 5.5%) which is a tad shy of the 4 & 8 quarter average earnings moves of about 5.25%.

*The implied move can be figured out by taking the cost of the weekly at the money straddle (the sum of the Put and Call of the same strike in the same expiration) and dividing by the stock price.  At the moment, with AAPL a tad above $130, the May 1st weekly 130 call is offered at $3.75, and the May 1st weekly 130 put at $3.45.  If you bought the straddle for $7.20, you would need a $7.20 / ~5.5% move in either direction (above $137.20, or below $122.75) to break-even for the week. The one day move post results will obviously be a bit less than the weekly (which is really just four trading days).  

Sentiment:  Analysts remain very bullish on the shares with 37 Buys ratings, 17 Holds and only 2 Sells with an average 12 month price target of about $143, or about 10% higher than current levels.  Short interest is about 1% of the float.

Options Open Interest: Calls have been much more active over the past month, despite the stock trading within a very tight range of $123 and $130.  The 1 month average call to put ratio is about 2.4 to 1.  Nine of the ten largest strikes of open interest are calls, with the two largest strikes of open interest 125,000 of the May 1st weekly 125 calls and 111,000 May regular 130 calls. The third largest strike of total open interest is 108,000 of the May 1st weekly 125 puts.

Price Action / Technicals:  The chart has been in a beautiful uptrend since the lows in 2013, with the recent consolidation below the February highs now looking a bit like a launch pad:

[caption id="attachment_53100" align="aligncenter" width="600"]AAPL 1yr chart from Bloomberg AAPL 1yr chart from Bloomberg[/caption]

Don’t just take my word for it. My Options Action friend and chartist extraordinaire Carter Worth, broke it down on Friday’s show:

While I said above the implied move looks “fair” it is important to note that the implied move of about 5% is equivalent to about $38 billion in market cap.  On January 29th prior to AAPL’s Q1 report, the options market was also implying about 5%, and it bested that by a touch, but the stock has risen 20% since then, gaining more than $120 billion in market cap since.  The higher the stock goes the harder it becomes for the stock to continue its pace of upward trajectory, simply because the size of the market cap moves are so massive. That is, unless a large portion of the investment community is correct and the stock is going to straight to $1 trillion in market value, just to get it over with.

Fundamentals / Valuation: All good in the hood obviously. The one hiccup in the quarter should be the continued deceleration in iPads as they have moved to ex-growth, but analysts and investors don’t appear too concerned as Watch and Pay should be able to pick up the slack in the coming quarters.

I suspect the following seven items will capture most of the focus: iPhone unit sales, ASPs (average selling prices which reached a record $687 last quarter, helping gross margins, Q3 guidance, initial demand color on Watch, foreign exchange headwinds and of course update to capital return plan.

The whisper for iPhone units is about 60 million, down from last quarter’s eye popping 74.50 million iPhones but still up more than 30% year over year.  Gross margins, which last quarter benefitted from a mix shift to higher priced 6 Plus and the ones with the bigger geebees could have seen a slight reversal after the pent-up demand for these devices waned a bit (the company guided to 38.5% to 39.5% after posting its highest quarterly gross margin of 39.87 since Q4 2012. Guidance is obviously what the stock will trade on as investors will want to see the runway for iPhone 6 upgrade cycle, especially as we get closer to the September refresh, and what if any contribution the company sees from the release of Watch in the quarter. Conservative estimates are for high single digit million units at an ASP of about $500 for the year. To do a little math, if the company sold 10 million units at an avg of $500 each then you would get $5 billion in sales, or about 2% of their expected $227 billion in sales in the current fiscal year.

Oh, and valuation. With the stock at all time highs, the stock’s still cheap relative to the market, trading at 15x expected eps growth of 35% for fiscal 2015 and expected sales growth of 24% (excluding the company’s $178 billion in cash the stock trades below 12x).

Volatility Snapshot:  The implied move of about 5% looks fair to maybe cheap, but that is also a function of the broad market and the fact that AAPL’s realized volatility (white line below: how much the stock has been moving) is at the lowest levels of 2015, and implied vol (blue below) is well below the levels prior to its Q1 report in January:

[caption id="attachment_53095" align="aligncenter" width="600"]AAPL 1yr chart of 30 day at the money IV (blue) vs 30 day realized vol (white) from Bloomberg AAPL 1yr chart of 30 day at the money IV (blue) vs 30 day realized vol (white) from Bloomberg[/caption]

My View:  Expectations are as high as they have been for the company since the fall of 2012.  While investors have become accustomed to the company sandbagging guidance it is important to note that Tim Cook has clearly stated that he wants to give “realistic” guidance that should be taken at face value.

If iPhone beats, positive body language for Pay and Watch, Gross Margins better than guide, FX headwind managed, ASPs stable, capital return plan in line with baseline expectations and forward guidance that bridges to the Sept quarter launch of next iPhone, then the stock will clearly be in breakout mode with no overhead resistance.  That is the optimistic set of outcomes.

The main reason I am skeptical on the stock here is because so few others are. It feels a lot like September 2012. prior to the stock’s big selloff from highs, that resulted in a 45% decline over the coming year.

I have no investment position and as a trader I have no desire to buy or sell the stock into the print.  In the near term $120, the prior breakout level from early February would be a very nice entry point for those who think they missed the boat, with $105 being back up the truck territory:

[caption id="attachment_53102" align="aligncenter" width="600"]AAPL 6 month chart from Bloomberg AAPL 6 month chart from Bloomberg[/caption]

Stay tuned as we will have our normal set of options trades / overlays in the coming hours for those with existing positions or directional inclinations.

Cheat Sheet:

Expectations Per Bloomberg:

-iPhone units: ~58 million
-iPad units: 13.6 million
-Mac units: 4.7 million
-iPhone ASP: $656
-Gross Margin: 39.47%