October 28, 2013 (10:00 pm)
On Saturday, we provided an analysis (here) forecasting a near-term pullback in shares of Apple due to: (1) the shares having run $130 over the past three months, (2) spending multiple days well above the upper Bollinger Band, (3) negative divergence with RSI, (4) nearing the target of its double bottom breakout, and (5) a comparison to a similar price pattern in 2011. After earnings were announced this afternoon, the shares indeed pulled back sharply (down $20 at one point) before reversing course during the conference call. Let’s start with a quick roundup of the fundamentals before discussing the technical picture.
APPLE: THE FUNDAMENTALS
iPhones: 33.8 million sales at $577 ASP. Our revenue estimate of $19.5 billion was literally hit squarely on its head. While we projected 32.5 million iPhone sales, which was surpassed by 1.3mm units, the average sales price was lower than we expected. Generally, that isn’t much of a surprise, since a beat on unit count means they likely sold more iPhone 4 and 4s (at a lower price point) than we had expected.
iPads: 14.1 million sales at $439 ASP. Our revenue estimate of $6.5 billion was missed by $300 million, driven by an overestimation of unit sales (15.0 million). Our ASP forecast of $435 was accurate, with only a $4 variance from the actual average price.
Macs: 4.6 million sales at $1,230 ASP. Our revenue estimate of $4.9 billion was low compared to the $5.6 billion actually generated. This was largely attributable to the significantly higher sales than we projected (3.8 million). However, the impact was somewhat muted by the significant decrease in ASP from the previous quarter (well below our estimate of $1,300).
iPods: 3.5 million sales at $164 ASP. Our revenue estimate of $600 million was well within striking distance of the $573 million in actual sales. However, our mix was off slightly, with a higher sales number (3.75 million) but lower ASP estimate ($160).
iTunes & Accessories: $4.2 billion and $1.3 billion, respectively. Our aggregate estimate of $5.5 billion in these two categories ($4.0 billion and $1.5 billion, respectively), are spot on with the actual results.
Revenues and Margins: $37.5 billion, $8.26 EPS, 37.0% margin. Overall, our estimates of $37.0 billion, $8.33 EPS and 37.0% margin were extraordinarily close to the actuals. We’re relatively happy with our analysis this quarter and are comfortable that we have a good grasp of Apple’s broader fundamental picture as well as a new-found understanding of their guidance, which will help us moving forward.
LOOKING FORWARD TO 1Q2014: The mid-point of Apple’s guidance is $56.5 billion. We are anticipating a 4.5% beat on the top line, based on recent results vs. guidance. We worked backwards to estimate the most reasonable mix of iPhones/iPads/Macs/iPods, which you can see broken out. We initially wanted to project a higher iPad unit figure, but are somewhat worried about supply constraints (especially with the mini, which isn’t being introduced until late November) and the fact that the new iPad Air won’t begin sales until November. We’re tempering our estimates on that end, but are making it up with higher iPhone sales. A massive number of phones – predominantly the 5s – which were ordered during and after the launch were pushed into this quarter. We expect a blowout on the iPhone front. We also expect Apple margins to come in at the high-end of the range at 37.5%, which would drive LTM earnings back over $40 – significantly, this would be the first growth in earnings in a relatively long time.
APPLE: THE TECHNICALS
Updated Comparison to 2011: We’ve harped on this chart a number of times. Until this scenario is invalidated, we will continue to use it to our advantage. Remember: technical analysis is not voodoo; it’s the study of investor psychology and historical patterns.
We noticed two more factors that contribute validity to the comparison to 2011. The first is that MACD, not only RSI, has now formed significant negative divergence. The second is that, in both the 2011 and 2013 patterns, the run from the low (Point 1) to high (Point 7) has been exactly 36%. See the updated chart below.
Negative Divergence: We included the chart below to get a closer look at the negative divergence that has formed on both the RSI and MACD over time. This has taken place on several occasions in the past. In each case, the divergence has preceded a significant and near-term pullback in the shares (note, however, that the March 2012 RSI divergence was not confirmed by MACD).
Rounding Bottom: We’ve focused on the potential near-term downside, but we don’t want to lose sight of the bigger picture. This rounding bottom + handle is a powerful chart. We fully anticipate the target being met in the Spring of 2014.
Conclusion: The whipsaw we saw in after hours trading leaves us uncertain which direction the stock will trend tomorrow. We believe that, even if the shares manage to rally tomorrow, it will likely end up being a “blow off top” before a pullback. The shares have run almost $140 in just the past three months (and $80 in 5 weeks).
However, there are a number of things we’ll be watching that could invalidate our near-term thesis: namely a China Mobile deal or an introduction of a new product category before the holidays. Otherwise, we’ll be looking at three re-entry opportunities:
- Rounding bottom support line at $510
- 50 DMA at $492 (currently)
- $480 previous consolidation level
We are extremely bullish longer-term and expect to have a full allocation of Apple positions as we head into the Holidays.