Apple Growth Story: Borrowing From the Future

April 14, 2016

We were asked a seemingly simple question this morning. What did we, as Apple investors, miss last summer that could have helped us to avoid the steep correction in share price? There are a myriad of possible answers. But the most elegant and reasonable is actually the simplest. Apple borrowed growth from the future.

Apple has created a relatively well-established trend as far as growth rates when you look at specific quarters. Below, we look at each particular quarter with actuals going back to the beginning of 2011. We use a regression analysis to determine where unit sales should have been in 2015 and in the future. Let’s take a look.

Note: blue columns represent actuals; red columns represent our expectations for the March and June 2016 quarters, and the small red triangles extrapolate the likely future unit sales.

March Quarter. Based on the chart below, it’s easy to see that the March 2015 quarter was a blowout as far as iPhone unit sales. As a consequence, fewer are likely to have purchased new phones in the March 2016 quarter. That’s why we say that in 2015, Apple “borrowed” growth from the future. Based on the regression analysis, unit sales should get back on track in the March 2017 quarter with north of 65 million units.

iPhones March

June Quarter. The June regression analysis shows a similar dynamic to March, but to a lesser degree. Apple will likely post a smaller iPhone unit sales count in the June 2016 quarter than it did the year prior. But also just like March, the June 2017 quarter should get back on trend with just under 55 million unit sales.

iPhones June

September Quarter. Here’s where things get interesting. In September 2015, there was no “borrowing” of future growth. Therefore, this upcoming September 2016 should see strong year-over-year growth of roughly 55 million units, with similar growth in 2017. Investors are likely already factoring a decline in June 2016 year-over-year sales. But after Apple reports in March actuals / June guidance in two weeks, September will be coming into view. We believe that’s key, as investors are always forward-looking (roughly 6 months). We feel particularly good about this quarter as the R-squared – a statistical measure of how closely data fits to a regression line – is almost 100, meaning the growth is almost exactly linear and easily estimated.

iPhones September

December Quarter. Here’s where the real fun starts. Apple started “borrowing” future growth in iPhone unit sales in December 2014. That’s why the December 2015 numbers were as weak as they were. But this upcoming December 2016, Apple is likely to get back on trend. The regression analysis infers that roughly 85 million unit sales are likely to be announced – based on the established longer-term trend of iPhone unit growth. That works out to a roughly 10 million unit increase each year from 2011.

iPhones December

What Does This Mean? The downtrend in Apple shares should be coming to an end. In just 10 short weeks, the June quarter will be closed out and behind us. From that point, Apple will no longer be faced with the headwinds of strong quarterly comparisons. It will be important to see how future unit sales compare to these regression lines; it will allow us to see whether Apple is likely to face the same issues in the future.

Apple: An Inflection Point

April 12, 2016

Shares of Apple have spent the last 10 days consolidating just under the 200 day moving average. As we outlined in our early March post on the fundamental side (Apple: EPS Growth to Resume this Summer), we perceive the highest risk in shares is to the upside. Let’s take a close look at the near-term trends and work our way out to the longer-term price action.

200 DAY MOVING AVERAGE. Apple has been consolidating at the 200dma for two weeks. During the entire rally from early February, it established a trend of gapping higher than consolidating for a few days before continuing. That may be exactly what we’re seeing here. RSI has back off from very elevated levels, and shares have largely remained above the 8ema, which we view as the near-term trend signal.

AAPL 200dma

NEAR-TERM BULL FLAG. Here is a closer look at the full flag consolidation that shares have formed. The upper trend line is sitting essentially right at the 200dma. Shares have rallied strongly over the previous several weeks and it’s not uncommon for a brief period of consolidation before moving higher. As long as it keeps its support at the $108 level, the path of least resistance is up.


ESTABLISHED DOWNTREND. Since its peak in July 2015, shares have formed a downtrend. Interestingly, this downtrend line is sitting squarely at several crucial resistance levels. The first is the blue downtrend line itself. The second is the 200dma (not shown on this chart; see above). The third is the 50% Fibonacci retracement level of the entire correction since mid-2015. A break out from the bull flag would also pierce through all of these resistance levels that sit at the $110-$111 levels. It’s relatively clear air up to $120 above that.

AAPL Downtrend

START OF A NEW UPTREND? Clearly Apple has been in a sustained downtrend since mid-2015. A downtrend is defined as a series of lower highs and lower lows. You can see that beginning in late May 2015. However, the tide looks to be turning here. In January, Apple wasn’t able to achieve a lower low compared to the price seen in August 2015. That is beginning to look suspiciously like a higher low. Just the opposite of a downtrend, an uptrend is defined as a series of higher highs and lower lows. Therefore, if Apple is able to achieve a higher high (above the $123 level), it will objectively be in an established uptrend.

It’s also important to know how crucial the 25ema has been in signaling a shift in trend. See each of the blue inflection points marked on the chart.

AAPL Weekly Uptrend

25 EXPONENTIAL MOVING AVERAGE. We briefly mentioned the 25ema in the up/down trend analysis above. But this one deserves some more attention. Notice how each sustained correction is marked by three important attributes. The first is a several month period below the 25ema. The second is sustained bearish RSI (area highlighted in red). The third is a touch of the 0%BB (touch of the lower Bollinger Band on the weekly chart).

Before this most recent correction, there have been four cases over the past ten years that fit this bill. In each case, the shares crossed back over the 25ema at the same time the RSI crossed back into the green (bull) area above the 50 level. In each case there was a 16-30% gain in just the next 8 weeks. Shares were recovering from severely oversold conditions. This past November, shares looked poised to see the same strong run, but the rally failed. How will shares handle it this time?

Weekly 25ema

LONG-TERM TRENDS. The 8ema on the monthly chart is extremely telling, too. Above that line, shares are in rally mode. Below it, they are in correction. It’s almost clear as day. You can also see either a rounding or double bottom in each case. Of the three severe corrections in the past ten years (not counting the most recent one), shares have spiked 13-23% in the month following a cross back above the 8ema, and have continued to rally for several months. That’s where we stand today.

AAPL Monthly 8ema


Apple: EPS Growth to Resume this Summer

March 1, 2016

We expect Apple to report the first decrease in LTM (prior four quarters) EPS for the March quarter since the middle of 2013.  The last time EPS saw a decline, shares priced in that decline roughly six months beforehand; likewise, just about six months before it reported a return to earnings growth, shares began to rally.

We saw the same thing this time around. Share price peaked in April, several months before it became clear that the holiday 2015 numbers would not be as stellar as anticipated. Now the big question is when will Apple return to earnings growth? We expect the June quarter to begin that trend, followed by significant jumps in EPS during the September 2016 and March 2017 quarters. If that’s the case, investors should begin to reprice shares over the coming weeks.

AAPL - 2.29 EPS Growth

Additionally, shares of Apple have respected one of the most important technical indicators out there. The Fibonacci levels are crucial here. During the 2012 “crash” in Apple stock, the shares respected and held the 50% Fibonacci retracement level (measuring the beginning of the rally in 2009 to the Sept 2012 top). Likewise, Apple has held that 50% retracement level from the 2013 trough to the April 2015 highs. Our thesis is that the confluence of this event in combination with the fundamental picture are aligning for a positive 2016.


Lastly, the Bollinger Bands on the daily chart are as tight as they’ve ever been (less than $5 width). This is significant, as the BBands represent not one, but two standard deviations from the 20DMA. When this happens, we tend to see an explosive move in the near-term in the magnitude of 7-10%. It’s interesting to note that AAPL is bumping right up against the 50MA right now. A break above that level, which it hasn’t traded above in almost 3 months, is likely to cause a big move.

All Eyes on Apple

JANUARY 26, 2016

Few things are as frustrating as when well-known investment professionals act absolutely certain of a specific future outcome. It’s irresponsible as a fiduciary to one’s clients. And, just as important in our eyes, instead of trying to educate the public, it’s simply fanning the flames already burning wildly. This morning, Dennis Gartman proclaimed that “crude oil will never trade back above $44 in my lifetime.” Sure it won’t, Dennis.

Nor will Apple be able to continue its success. If you’ve been reading the press and analyst reports, it is abundantly clear that Apple’s best days are behind it. Just as the oil-trade has become almost entirely one-sided (my family and friends who tangentially follow the markets just “know” it will continue lower), so has the Apple trade. The iPhone business has peaked. The Watch is a huge disappointment. The iPad has little potential to expand. The Car is DOA.

Forget the narrative. Since when has it worked in this company’s favor anyways? The cycle has become incredibly consistent. When everyone agrees with the growth story, shares tend to top out. And when everyone agrees that the upside is limited and the company has peaked, shares tend to be in the final stage of a bottoming process.

A REPLAY OF 2013. Last week as AAPL quickly descended to re-test the August capitulation lows, we released the chart below. There are so many interesting correlations to consider.

First, for a multi-month period during 2012, shares formed a head-and-shoulders topping pattern. When it broke down from that topping pattern, it experienced a dramatic 25% drop in a short amount of time. After bottoming near long-term support (the $51-$54 range established before its huge run-up), it tested and then re-tested the 100 DMA. The week before a crucial July earnings report, shares re-tested the lows at $53, then rallied to the 20 MA level into the earnings announcement.


Fast forward to today. We can really just cut and paste from the section above. For a multi-month period during 2015, shares formed a head-and-shoulders topping pattern. When it broke down from that topping pattern, it experienced a dramatic 25% drop in a very short timeframe. After bottoming near long-term support (near $94, the previous all-time high), it tested and then re-tested the 100 DMA. The week before a crucial January earnings report, shares retested the lows at $93, then rallied to the 20 MA level into the earnings announcement.

  • A secondary observation is that the RSI levels during the initial bottom, test of the 100 DMA, and re-test of the bottom all occurred almost precisely at the 25, 70 and 25 RSI levels.
  • A final observation is that each time over the past five years that the MACD dropped to a -4, shares of AAPL rallied between 17%-19% in just a few days. It did so again last week. That equates to $110 after earnings, which interestingly is almost exactly at the 50 MA.

The question of the quarter is, will this double bottom hold as it did in 2013? If shares do break upward after earnings, the pattern will continue to look an awful lot like July 2013 with a strong double bottom possibility. That said, a double bottom is not confirmed until/unless the $125 level is definitively broken.

FIBONACCI SUPPORT. A completely independent piece of evidence that AAPL may be bottoming is found in the Fibs (i.e. Fibonacci levels).

After the 2009 bottom, shares of AAPL climbed consistently for almost three and a half years. When shares did fall back during the 2012/2013 “Apple crash”, it found both initial support (capitulation bottom) and final support (double bottom) almost exactly at the 50% Fibonacci retracement of that entire 2009-2012 run-up. From the lows of 2013, shares of AAPL climbed for another two years. It found initial support (capitulation bottom) and a secondary support (potential double bottom) almost exactly at the 50% Fibonacci retracement of the 2013-2015 run-up.


All eyes will be on AAPL this afternoon. Don’t be surprised to see the shares become extremely volatile into the close. Notice that we have made no claims to be certain about the future price action. Based on the price action and technical evidence before us, we expect that the likelier possibility is for shares to be in the late stages of a bottoming process. But there can never be absolute certainty in the investing and trading process. A truly riskless investment does not exist in the equity markets; but by accumulating independent pieces of evidence, you can shift the odds in your favor.

FUNDAMENTALS. A quick rundown of our estimates and March guidance are below:

  • Revenues: $77.7 billion;
  • EPS: $3.37 ($9.51 LTM / 10.5x PE at the current price);
  • iPhones: 81.5 million @ $660 ASP
  • iPads: 14.5 million @ $420 ASP
  • Macs: 5.75 million @ $1,250 ASP
  • Watches: 6.5 million @ $446 ASP
  • GM: 40.0%

Guidance will be very important. The general consensus among analysts is that Apple will report at or just below its top end of guidance for the December quarter (we’re slightly above that). However, there is a considerably large range for the March quarter. We’re currently at 63.5 million iPhones, which we view as conservative representing less than 4% YOY growth, and gross revenues of $60.7 billion, less than 5% higher than the year ago quarter. If the revenue guidance mid-point is around the $57.5 billion area, our expectation will be confirmed.

Oil: Signs of a Bottom

December 10, 2015

As we reviewed the oil charts this morning, it became apparent that many technical factors are beginning to align that may give the bulls some room to run. The “Drudge Indicator” is flashing, and the general population has a suddenly expansive knowledge and understanding of the oil economy and its underlying supply and demand trends. As any family member can tell you over the holidays, Saudi Arabia will continue to flood the market until all others have gone bankrupt, and oil will of course trade down to the $20’s. Right. We all know how things like this tend to play out once the direction is “absolute” and “clear”.

The three charts below of WTIC (spot price of light crude oil), USO (oil ETF) and UCO (2x oil ETF) all show the same thing. Not a surprise, since they’re based on the same underlying asset. But it’s important to review them individually for clues. What you’ll see is the following. The volume has absolutely skyrocketed during 2015 and shares have formed a falling wedge pattern (generally bullish, as new lows become less and less pronounced). And that comes while price is showing massive positive divergence from RSI and MACD. What that means is that price is forming lower lows while the technical momentum indicators are forming higher lows. The downward momentum is slowing. This, along with the massive volume into the lows, may be a sign of some serious accumulation by the largest institutional investors into the asset class.

UCO (ProShares Ultra Crude Oil)


USO (US Oil Fund)


WTIC (Spot Price of Light Crude Oil)