Apple Fiscal Q3 Earnings Preview

by Dan July 21, 2015 11:28 am • Commentary

Event: AAPL reports fiscal Q3 results tonight after the close. The options market is implying about a 5% one day move, which is in line with the implied move prior to their last report, and rich to the 4 qtr avg one day move of about 3% and the 8 qtr avg of about 4.5%.

Sentiment:  Analysts remain very bullish on the shares with 40 Buys ratings, 13 Holds and only 2 Sells with an average 12 month price target of about $149.50, or about 15% higher than current levels.  Short interest is about 1% of the float.

Price Action / Technicals: Prior to the Q2 report, AAPL was trading at nearly identical levels to where it is trading now, just hours before the fiscal Q3 print (circled):

AAPL ytd chart from Bloomberg
AAPL ytd chart from Bloomberg

The year to date chart above shows obvious technical resistance at $133, which was stock’s high this morning.   Looking in the other direction, $120, which is also the 200 day moving average (yellow line below) looks to be massive near term technical support. So basically the range is from July 9th’s 5 month lows, to this morning’s high:

AAPL ytd chart from Bloomberg
AAPL ytd chart from Bloomberg

Expectations:  I am not going to try to re-invent the wheel here, Business Insider reprinted Neil Cybart, author of the Apple focused Above Avalon blog‘s detailed quarterly preview (read here). Here are some highlights:



Apple Watch

Even though Apple is not expected to disclose Apple Watch sales, keen observers with an Apple earnings model will be able to back into a relatively good approximation of Apple Watch sales. I am expecting Apple to have sold 4.25 million Apple Watches from April to June. While there has been much debate as to how the Apple Watch has been selling, more time will be needed to gauge normalized demand; there was evidence of pent-up demand at launch as would be the case with any new Apple product category.



Vol Snapshot: As for options prices, they seem fair for the event, but possibly expensive relative to the low levels of realized volatility.  In the event that the quarter is a non-event and the stock moves far less than implied, and there are no big surprises on guidance, implied vol should get back to the 52 week lows in the high teens.

AAPL 1yr chart of 30 day at the money IV (blue) vs realized (white) from Bloomberg
AAPL 1yr chart of 30 day at the money IV (blue) vs realized (white) from Bloomberg

My View:  Regular readers know this, I am a huge fan of Apple the company, a happy consumer of their products, but I take a slightly contrarian view of the investment world’s universal bullishness of the stock. Not that I think it’s a massive overvalued short, but that it’s a really crowded trade that is going to have a tough time outperforming the market like it has the past few years. In full disclosure I have no position in the stock or options, and frankly no axe to grind, but it is a useful exercise for my readers and viewers on CNBC to analyze the bullish thesis from a more skeptical viewpoint.

Since writing on AAPL on July 6th (read here), my view has not changed on potential issues facing the stock in the near term:

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?

Oh, and what will China bring? Also from July 6th:

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?

At this point, its my view that AAPL’s 70% year over year growth in China in fiscal Q2 and the fact that AAPL sold more iPhones in China last qtr than they did in the U.S. pose more risk in the near term (in the event of a slowdown in the country) than potential upside that investors have become accustomed to.  This is just a guess, but it seems that the street/ investors are in universal agreement that the blow out results from China will not see hiccups. But the quarter that it does the stock will likely see a near term re-set, especially if the stock is at a relative high.

We will follow up with some trade ideas depending on your current positioning or directional inclination.