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.

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)


Speculation: The Excesses of AMZN

NOVEMBER 4, 2015

Shares of Amazon have surged well over 120% in just the last ten months. It’s rarely our philosophy to bet against a trend, and it’s almost never a profitable endeavor. Nonetheless, it’s hard to ignore the similarities between the current price action in Amazon and the “blow-off top” that Apple created in 2012.

BUMP AND RUN REVERSAL (BARR) is a reversal pattern that is designed to identify speculative advances that are unsustainable for a long period. There are three main phases to this pattern:

  1. Lead-In Phase. The first phase forms the basis from which to draw the trend line. During this phase, prices advance in an orderly manner and there is no speculation.
  2. Bump Phase. The “bump” forms as shares sharply advance, with prices moving further away from the lead-in trend line. The angle is typically 50% greater than the angle of the lead-in trend line. It is important that the bump represent a speculative advance that cannot be sustained for a long period. To validate the level of speculation, the distance from the highest high of the bump to the lead-in trend line should be at least twice the distance from the highest high in the lead-in phase.
  3. Run Phase. After speculation dies down, prices begin to peak and form a topping pattern. The “run” phase really begins when the pattern breaks the trend line support. Once the break occurs, the run phase takes over and the decline continues. Since prices rise very fast to form the bump, the subsequent decline can be just as ferocious.

Apple in 2012: An Example. From 2009 – 2012, shares of Apple formed a well-defined uptrend (lead-in) that was tested and held as support on multiple occasions. In early 2012, price began to expand exceptionally fast, just about doubling by September ($50 to $95). By September, shares had formed a significantly steeper “bump” trend line and had also created a negative RSI divergence – meaning a higher high in share price with a lower high on the RSI (a measure of momentum). Once the “bump” trend line broke, shares fell in an almost unbelievably dramatic fashion, losing nearly 50% of its value in just six months.


Amazon in 2015. Shares of Amazon formed a very well-defined uptrend over the course of six years, with multiple tests of the trend line. In early 2015, shares began to speed higher. Price hit $290 in January, and this morning touched the $646 level – a 125% increase in just nine months. Similar to Apple, price has formed another much steeper “bump” trend line and has now formed a potential negative divergence with RSI (higher high in price with lower high in RSI). Now, we say potential because a reversal has not yet occurred. It is possible that share price continues to accelerate higher and actually reach a higher RSI level.


The level of speculation and bullish energy in Amazon right now is clear everywhere you look. From a fundamental standpoint, shares are trading at a 930x PE (yes… 72x Apple’s PE and even 26x Google’s PE). That often gets explained away as “they’re reinvesting in the business”. Even Stanley Drunkenmiller yesterday said that Amazon is a great buy because Jeff Bezos is a “serial monopolist.” But that’s not the point. The fundamentals are often lead by the technicals. In fact, during Apple’s peak, we saw the same type of investor sentiment. The iPhone 5 had just been released and Apple could do no wrong. But it’s decline in share price forecasted declining EPS roughly six months before it was actually reported in their quarterly earnings.

We are not involved in this name yet. Once (we should really say “if”) shares do end up forming a topping pattern in the next several weeks, it may prove to be a uniquely profitable trade on the bearish side for 2016.

Apple: A Positive Shift in Sentiment

October 28, 2015

Apple reported a solid quarter and provided guidance that was slightly ahead of our expectations (you can check out our pre-earnings expectations here). The most important pieces of the report weren’t provided in writing, but rather gathered from Tim Cook’s comments on the conference call.


  • iPhone. Missed our estimates on the unit count, but ASP was well ahead of our expectations. Overall, revenue came in just 0.7% below our projection. We don’t see this as a negative; instead, we view it as Apple management shifting sales into the much tougher comp – the December quarter.
  • Macs. Our revenue projection was within 1.0% of the actuals, with units very slightly below our estimates, but ASP making up much of the difference.
  • iPad. This was the most meaningful departure from our estimates. Not only did they sell nearly 400,000 more iPads than we expected, but the ASP was also $23 higher than we expected.
  • Apple Watch. We were way too optimistic about the growth in the Apple Watch. Based on our estimates, Apple sold 3.6 million units, well below our 5.0 million projection. This growth rate looks very similar to the iPad after its introduction. We had expected higher growth since the iPhone installed base is so much larger now. Therefore, we’ll be reducing our estimates for Fiscal 2016.
  • Revenues. Overall, revenues came in 1.3% ($692,000) below our estimate. This can almost fully be attributed to the lower than expected Watch sales (1.4 million units x $450 ASP = $624 million).
  • EPS. We had projected $1.98 in EPS, just $0.02 above the actual.

Overall, we were ranked #12 of 33 analysts, both independent and professional, by Philip Elmer-Dewitt (here).

Guidance and Revised Estimates for Q1. Apple management guided to a mid-point of $76.5 billion for the December quarter. This is slightly above our $76.0 billion expectation. They set the low-point over $1 billion higher than last year’s actuals, deafening the crowd that was calling – not only for zero growth – but for negative growth. Tim Cook was also explicit when he said that iPhone revenues would be up, and so too would iPhone unit sales. It would not be a “trick” generated simply by higher ASP’s. It’s more unit sales. He was also clear about his view toward China. There has been no slowdown for Apple.

  • Macs. We’re bringing our estimates down from 5.80 million units to 5.75 million.
  • iPads. We’ll be raising our iPad estimates to 15.5 million units from 14.5 million units, due to the higher sales in Q4, the iPad Pro introduction, and increasing confidence in this category into the holidays.
  • Watch. We were disappointed by the numbers in Q4 and will be decreasing our estimate from 7.5 million down to 6.5 million. This is very similar to the iPad launch. In its second quarter, it gained 900,000 sales over the prior quarter (same as Apple Watch). In the next quarter, which was the Holiday quarter, it generated an additional 3.0 million sales.
  • iPhone. We’ve had our estimates at 82.5 million units and have decided to leave it as is.
  • Revenues. Based on these estimates, we’ve projected $79.9 billion in revenues. This equates to a 4.5% beat vs. the guidance mid-point. We feel very comfortable with this.
  • EPS. These estimates lead to an EPS of $3.48. This would equate to an LTM EPS of $9.62.

Fiscal Year 2016. We’re currently estimating FY2016 revenues at $255 billion with $10.63 EPS. Many investors are concerned that Apple can’t beat the “tough comps” coming up over the next few quarters. On the call yesterday, Tim Cook mentioned a single word several times: “subscription”. He views the iPhone as a subscription business, and so do we. The annual upgrade plan even more so, as well as the future roll-out of carrier billing via Apple. The growth in China continues to be more than robust and nearly 70% of the iPhone installed base has not yet upgraded to a 6/6s device. The negative foreign exchange headwinds will also decrease substantially after 1Q 2016.


Apple’s post-earnings reaction was very muted. The after-hours action was essentially nill. This morning, shares traded up slightly, and rallied slowly throughout the entire day. Shares are now sitting at the highest level since mid-August, over two and a half months. They ended the day near a critical make-it-or-break-it level, as you will see below. It certainly looks bullish, but keep in mind that we’ve got to get back above the $120 and 200dma level – and do so quickly to keep the momentum in a positive direction.

Inverted Head and Shoulders. Shares of Apple closed today just above the highs from last Friday, and at the highest level since mid-August. There’s a lot in the chart below. First, the inverted head and shoulders below is clear. It has technically broken the neckline ($117.50), and has a price target of $142. We love it when multiple pieces within a chart fit and work together. Interestingly, the Fibonacci extension levels all correspond exactly with very significant resistance levels. As you can see, each of them lines up – the 38.2% with the bottom of the post earnings gap, the 50% with the top of the gap, and the 61.8% with the all-time highs.

Additionally, the RSI has broken out of its downtrend and successfully tested it on the breakout. And the MACD is very bullish, starting from low levels and has room to run. Lastly, the 200dma is *still* rising, as surprising as it may be, and the 50dma is no longer falling.


Post-Earnings MACD. The MACD has risen into each of the five earnings announcements shown below. In two prior examples, the MACD continued to be bullish after earnings. In those two cases, shares continued to rally in a very significant way for many weeks after the report. In the other two examples, the MACD turned down immediately after earnings and acted weak all quarter. We see the MACD after yesterdays earnings continuing to act very strongly. That bodes well for the quarter.

AAPL MACD on Earnings

The Trend is Your Friend. An uptrend is defined as creating higher highs and higher lows. You can see that in the chart below. In mid-September, Apple created a higher low. In the past couple of weeks, it created a higher high than early September. Shares are back in an established uptrend.

AAPL Trend

IMPORTANT LONG-TERM CHART. The weekly chart below includes the 25 exponential moving average (EMA). We view that as a crucial long-term chart, since it has acted as support during uptrends and resistance during corrections. You’ll notice that we shaded each period of time during which shares saw a meaningful correction (well below a 50 RSI). After those periods, once the shares re-take the 25EMA, there has been a meaningful rally within just six weeks, and often continued for several more weeks or months. Additionally, upper Bollinger Band has been touched within 6-8 weeks each time.

Well, shares just broke through the 25EMA (as well as the 50 RSI level, which has been associated with the bull moves in the past). We can expect the 100% – 125% Bollinger Band level to be touched around the holidays. While that range currently sits at $130-$138, it will rise if price does.

AAPL Weekly EMA and BBand

Post-Earnings Bollinger Bands. Below, we illustrate each Apple earnings report. In those instances when Apple hits the upper BBand within the week of the announcement, we’ve shown it as a bold green line. You can see that during those quarters that quickly rose to the upper BBand, there was a quick and meaningful rally of approximately 20% in six weeks. In the one instance where it was below that level (11%), that’s because it hit the prior all-time highs, where it found resistance for a short period.

AAPL BBands Post-Earnings

NASDAQ (QQQ). The NASDAQ index is sitting at its all-time highs. Can you believe how quick that was?? It formed a pretty well-defined double bottom, which targets new highs near $119. We may see a gap fill down to the $110 level, or a re-test of the breakout point at $109. But the longer-term uptrend is still intact.


S&P500 (SPX). The SPX has retraced the large majority of its losses. It gapped back up above its 200dma, re-tested it, and has since lifted off. The markets are looking solid at this point.

SPX Daily

Long-Term Trend. The long-term trend continues to be up. SPX bounced off the trendline where it formed a double bottom, and has since broken out (target at 2170, roughly 4% above current levels).

SPX Weekly