Name That Trade – $AAPL Watch

by Dan July 6, 2015 11:26 am • Commentary

In Apple’s (AAPL) fiscal Q2 quarter ended in March the company announced that sales in China were up 71% year over year to $16.8 billion, making it the second largest region by sales and overtaking Europe as second behind the U.S. Apple sold more iPhones in China than they did in their largest market in the U.S. and CEO Tim Cook sounded downright giddy on their conference call about the prospects for future growth (emphasis mine):

And so lots of positive things, and you know, as you probably heard me say before, I’ve never seen as many people coming into the middle class as they are in China. And that’s where the bulk of our sales are going. And so we’re really proud of the results there and continue to invest in the country.

While Apple’s 2013 deal to sell iPhones at China’s largest mobile operator China Mobile (CHL) with more than 140 million 4G users and their new larger form factors had something to do with the eye-popping growth in the quarter, there have been some reasons to be less optimistic about such out-performance in the current quarter.  First things first, CHL 4G subscriber additions have seen a lot of volatility this year (read here) with a large dip from March to April, but rebound in May.  I haven’t charted the iPhone adds vs palpitations in the Chinese stock markets or brokerage openings, but the emerging middle class that Mr. Cook is dependent on for Chinese growth could be in jeopardy of a set-back in if one of the most epic stock market bubbles in history inflates and collapses is the span of a few months. If the Shanghai Composite were to continue its crash, what would the effect be on iPhone sales in Apple’s most important growth region?

Apple has confirmed its fiscal Q3 reporting date for July 21st, and the options market is implying about a 5% move in either direction between now and then (with the stock at $126, the July 24th weekly 126 straddle is offered at $6.40, or about 5%. If you bought that you would need a move above $132.40 or below $119.60 to make money on July 24th expiration).

The implied move looks fair to cheap, considering that the stock has averaged 3.15% one day moves following the last 4 quarters, and 4.5% over the last 8 quarters. (The day of the company’s fiscal Q2 results on April 27th the implied move was about 4.5%.)

Could this quarter be controversial? Well for one, they are coming off an absolute blow out in the March quarter as that included the first full quarter of iPhone sales in both the U.S and in China.  Also, in April the company announced a large expansion to their cash return plan. So we won’t get any update there. We know that iPad will be weak, and expectations are not high for Watch, but acknowledgement of worse than expected uptake on the watch could be bad for overall sentiment.  Will there be an impact in fiscal Q4 of 3 months of free Apple Music on sales of iTunes download purchases? And will switchers and upgraders wait for the S edition phones due out in the late September?

As for the technicals, the stock has obviously lost some momentum of late down about 6% from the all time highs made in late April following earnings.   The stock is sitting on the one year uptrend, and while a break below would not be a disaster, holding support at $120, which is just above the stock’s 200 day moving average (yellow line below) is very important:

AAPL 2yr chart from Bloomberg
AAPL 2yr chart from Bloomberg

So in sum, we have the usual very bullish sentiment with high expectations, fairly cheap options prices (given the event and the market environment), potential external headwinds in a massive growth region and what appears to be waning momentum.

The stock has obviously been range-bound between $125 and $135 for the last 4 months, and I suspect there will be little in report or forward that causes the stock to breakout to new highs, especially when you consider the stock’s inability to hold its post earnings gains in late April on blow out earnings.