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.

AAPL

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.

AMZN

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.

FUNDAMENTALS

  • 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.

TECHNICAL ANALYSIS AND CHARTS

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.

AAPL IHS

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.

QQQ

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


Apple: A Pivotal Report

October 25, 2015

Welcome back, folks! Over the past three months, we’ve spent most of our time analyzing the Apple technicals on Twitter (you can follow our feed on the right sidebar of this page). With Apple releasing its fiscal 4Q 2015 earnings – and even more importantly guidance for the holiday quarter – on Tuesday, we wanted to prepare an update on our expectations. We will review both the fundamentals as well as the technicals, and our thoughts heading into the report.

FISCAL 4Q 2015 EXPECTATIONS.

AAPL 4Q15

So let’s look at this by category:

  • iPhone unit shipments tend to be slightly higher during 4Q than the prior quarter. This is largely driven by the introduction of the new devices in late September each year. While the prior (n-1) devices fall off a bit going into the release of the new devices, that dynamic is more than made up for by the annual surge at the end of the quarter. Based on the trend analysis we’ve conducted looking at the year-over-year (and quarter-over-quarter) growth in unit shipments, we’re adding 2 million units compared to last quarter and 10 million compared to last year. While it’s a big jump over last year on an absolute basis, the percentage growth is in-line with what we’ve witnessed in the past. Additionally, the move to a larger form factor is driving some additional growth in the 6-series devices. On a pricing basis, we’re projecting an ASP of $655. This equates to a $5 decline over last quarter and a $50 decline over last year. This is in-line with the 4S and 5S models, as a larger percentage of users purchase the n-1 device (i.e. the 6, not the 6s).
  • Mac unit sales will likely come in at 5.8 million units. This category continues to see growth, but is well-established at this point and easier to forecast than the iPhone and iPad categories which have seen varied growth rates over the past few years. Over the past four years, it has seen growth ranging from 22-25% over the prior quarter. That is a very tight and well-defined range. We are projecting growth of 21%, equating to 1 million more units than last quarter. Similarly, Macs tend to experience a $50 decrease in ASP between the third and fourth fiscal quarters. We are projecting a similar decline to $1,200 ASP.
  • iPad will likely see a further decline in unit sales. The holding period of these devices is far longer than we would have expected. We’re projected 9.5 million units were sold in 4Q, down 1.5 million from the prior quarter. We’re also estimating a minor decrease in ASP to $410.
  • Apple Watch has seen an enormous shift in sentiment over the past few months. The initial huge expectations has turned into almost an afterthought. We were surprised to see some of the extremely low numbers that others are projecting. We are projecting respectable growth from 2.6 million units sold last quarter (our own estimate, since Apple doesn’t disclose this) to 4.5 million units in 4Q. Tim Cook stated that there will be more Watches sold this quarter than last, and even more during the holiday quarter. Some took that to be his way of lowering expectations. In our view, he was simply stating the obvious. With the additional data point of both Best Buy and Target fast-tracking sales into as many stores as possible, it’s clear that these things are selling.
  • REVENUE. We are projecting $52.1 billion in revenues, which is 4% above their guidance. This would be the second lowest beat against their guidance over the past two years. We tend to have a conservative bias in our numbers, so feel good that our numbers are not only likely, but that there is more room to the upside than the downside.
  • EPS of $1.98 that we are projecting is $0.10 higher than consensus. The fact that we believe the risk to the upside is higher than the downside risk makes us comfortable that Apple will in all likelihood beat consensus for 4Q 2015.

FISCAL 1Q 2016 EXPECTATIONS.

Importantly, there is much more to the story than simply performing well last quarter. The guidance for the holiday quarter will drive the post-earnings reaction. During last year’s holiday quarter (1Q 2015), Apple experienced a huge beat vs. consensus, whisper numbers and even their own guidance. While they typically beat their own guidance by 4-7%, last year they beat their guidance by almost 15%. That has caused many to theorize that they simply “pulled” future demand into that quarter due to the spike in interest for the larger screen.

It’s a similar dynamic to what happened with the 5s device. After selling 10 million more iPhone 5 units in the holiday quarter than the prior year (4s), the transition to the 5s device only saw a 3 million increase. Share price started to decline in September 2012 in anticipation of these very challenging year-over-year comps. The fear at this juncture in the current environment is that we will see the same dynamic with the 6s device. Apple was able to sell 25 million more units in 1Q 2015 (74.5 million units) than they were able to in 1Q 2014 (51.0 million units)). No way Apple could beat a comp like that, right?

AAPL 1Q16

So why do we disagree with the general consensus?

We are projecting $80.1 billion in revenues and $3.56 EPS for the holiday quarter, based largely on the sale of 82.5 million iPhone units. There are a few dynamics we need to keep in mind here. Let’s first look at this from a “top down” approach, instead of a “ground up” approach.

Apple has never guided to a lower revenue number on an annual basis. Even in the weakest of their quarters, which preceded (and likely caused) the crash in late 2012, the still guided nearly $2 billion higher than the prior year actual revenues. They’ve been able to do this as the markets the products are available within and their market share continues to grow. Tim has continued to set expectations at a high level and has even gone so far as to send a letter to Jim Cramer explaining that growth in China continues to be robust. We do not believe he would be sending these signals had he expected growth to stop this quarter. Therefore, until proven otherwise, we have to assume that the historical dynamics will remain unchanged and that Apple will guide to a higher revenue number than last year ($74.6 billion). Furthermore, since Apple historically beats by 4-7% compared to their guidance, we know that they will not set themselves up to fail. In all of the quarters in which they’ve issued guidance going back to 2008, they have never come in lower than their guidance.

When you take all this together, it implies that current estimates for the quarter are simply too low. If they guide to a mid-point of $76 billion in revenues (just 2% above last year’s actuals), that sets them up for an $80 billion quarter. That’s just about exactly the figure we achieved when undertaking our “ground up” analysis above – by projecting unit sales and ASP for each category. It always gives us more comfort when multiple analyses line-up and point to a certain outcome.

TECHNICALS. Now for the fun stuff 🙂

Downtrend & Fib Levels. As soon as AAPL broke through the downtrend line from July earnings through early last week, shares surged. Significantly, not only did it break through every significant Fibonacci level, but it broke above the strong resistance level at $117.50 like it was nothing and closed above the $118.50 resistance level (dotted black line). You can also see the blue descending channel that looks suspiciously like an inverse head and shoulders pattern that has broken to the upside…

AAPL Hourly

Inverse Head & Shoulders. Speaking of the H&S bottom, see below. That’s almost as clear-cut as it gets. Don’t focus on the exact price of the shoulders. The premise is this. Shares form a new low price (left shoulder), then bounce to create a neckline. The bulls fail, and shares fall to a new low.  But the share price is able to recover to the same neckline area as the first bounce. On a subsequent drop, the bears fail and create a higher low – thus ending the downtrend (defined as creating lower lows and lower highs). Once the bulls are able to take price above the neckline, it’s a signal that a new uptrend is in effect (since there is a higher low and a new higher high). That is exactly what we’ve seen here. But we also have the important signals of RSI breaking through a nine-month downtrend (red dotted line up top) as well as a bullish MACD cross. We will be much more comfortable with the pattern if it’s able to break above the 200dma.

AAPL IHS

Bullish MACD Crossover. On the chart below, you’ll notice that we’ve seen a bullish MACD cross (green dotted lines) just prior to the four previous earnings announcements (black vertical lines). Two of these have preceded strong rallies, and two have preceded pullbacks. What’s interesting to note is that the two failed MACD crosses happened while price tested all-time highs on weakening RSI. That is no longer the case.

AAPL Daily Earnings MACD

Longer-Term RSI. While we’re on the topic of RSI, let’s look at a longer-term chart. There’s a curious recurrence taking place in the chart below. Each time the weekly RSI gets to a severely oversold level (i.e. deep into the red highlighted area) the shares have rallied to hit at least the top Bollinger Band, if not the 125% BBand level, within roughly 6 weeks. That equates to the $131-$138 level based on the current BBands, but remember the top Band will continue to rise with price.

AAPL Weekly EMA

Additionally, notice the 25 weekly ema on the chart above. It tends to act as solid support during uptrends, and marks a significant caution point when breached to the downside. However, each time shares have punctured back above this level, it has seen a significant rally.

25 Weekly EMA. Here’s a closer look at that 25 weekly ema. You can see the significance of this level. It’s also interesting to note that each time the EMA flattens, it tends to signal an inflection point in price. We just saw it turn back up slightly, which may indicate that shares are ready to resume their uptrend.

AAPL EMA Inflection

Daily Bollinger Bands. A very important piece of the puzzle is the BBands. This is a cautionary note heading into earnings. At the bottom of the chart below, we’ve included the %BB, which measures where against the Bollinger Bands that price is trading. We’ve provided colored circles for where shares sit along the BBands heading into earnings (red = top, green = bottom, grey = middle). Since the BBands measure standard deviation from the 20dma, it should be no surprise that shares tend to revert toward the mean. Historically, over the past three years, when shares are sitting at the bottom BBand (green), they rally after earnings; when sitting at the top (red), they either consolidate in the best case, or decline. It’s important to note that shares sat at the top of the BBands heading into both 2Q15 (April) and 3Q15 (July) earnings, and we saw a decline on both occasions. It’s important to keep this indicator in mind.

AAPL Earnings BBand

Bollinger Bands Over a Longer-Term. However, before thinking that we’ve turned into a raging bear, we’ve analyzed how share price tends to react to hitting the top of the BBands (100% BB). Interestingly enough, there is zero trend here. Out of the 24 occasions we measured below, 12 marked the top, and 12 marked either near-term consolidation, or a continued rally. The other aspect to note is that when shares did, in fact, continue rallying, the RSI leaped to the 80-90 level.

AAPL Daily BBands

CONCLUSION. Guidance will be critical here. We mentioned the BBands only because they were an important aspect to the prior two earnings announcements. We observed it both times but did not factor it into our investment decision. Based on all of the charts and fundamental factors, what we’re currently expecting is this. Apple will beat estimates in Q4 and issue guidance that implies an $80 billion quarter may be at hand. But we will not see a spike in after hours trading as we did for GOOG, MSFT, AMZN. Instead, we will see a more muted move over the next few days, followed by a rally to new highs as we enter the holiday season. We will be watching closely for clues over the next two days and re-assess as we head into the big announcement.


Apple: The Bulls Will Win This Round, Too

August 9, 2015 – UPDATE #1

So it seems that the title of our blog post has shifted from a prediction to more of a war cry. We will prevail! But we need to recognize that a prediction is simply one possible outcome. We always need to plan for other scenarios and know how we will react given a variety of circumstances.

We recognize that our recent posts may begin to sound like a broken record. But it all comes down to an important aspect of investing. An uptrend is defined as a series of higher highs and higher lows. In the intermediate-term, we continue to see higher lows. As long as Apple remains above $105, the intermediate-term uptrend will continue. However, the very near-term may see price continue to struggle a bit.

LONG-TERM TREND LINE. Let’s begin with the big picture. Shares of Apple have formed a well-defined and validated trend line since hitting the lows after the 2008 financial crisis. The trend line was tested in mid-2013 and fully validated in early 2014. Last week, this trend line was tested again and has since held. It’s also important to point out that each previous test occurred while price was below the important 25 ema, so the fact that it’s currently trading below that level is not the end of the world.

What’s interesting to note is that on each test of this trend line, we’ve seen very similar action in the Bollinger Bands. During the test of the trend line, the BBands became extremely compressed and shares closed the week near or below the lower BBand. Over the following 3-5 weeks, shares rallied to above the upper BBand in each case, which happens to currently stand at $133 (exactly where price was rejected just 3 weeks ago). This also tends to correlate with the typical price action following any weekly close near the lower BBand, after which we typically see a rally. Shares are extremely oversold, sentiment is very bearish, and headlines about a “2012 repeat” are flashing on common news headlines – all signs of a potential bear trap and reversal.

AAPL LT Trend 2

NEAR-TERM BEAR FLAG / 200 DMA. While we continue to be very bullish on shares in the intermediate-term (2-6 months), shares may struggle over the next few days due to a potential bear flag that has formed below the 200 day moving average. For full disclosure, we are holding zero near-term positions. We will not meaningfully adjust our intermediate-term positions unless Apple falls below the $104 level that marked the previous low from January. Below that level, it will have created a lower low on an intermediate-term basis. Above that level, the intermediate-term uptrend will not have been broken.

On the chart, you’ll notice three distinct areas. Below the $104 level, we will exit the majority of our intermediate-term positions and turn bearish due to price creating a lower low. Above $119, we will increase our bullish positions as shares re-take the significant support level and the 200 dma. Between those two levels, we are relatively neutral and will only slightly adjust our intermediate-term positions. You’ll notice we said nothing about our long-term positions… this is because from a fundamental perspective, Apple is running on all cylinders and we expect much higher prices. But for more time-sensitive positions, we may not be able to outlast a downturn, even if (especially if) we believe the market is mis-pricing an asset.

AAPL Range

FIBONACCI LEVELS. We put the chart together (including the shaded blue circles at Fib levels) last Monday. While the 61.8% Fib retracement was briefly pierced, it generally held up as support.

AAPL Fib

DIVIDEND-RELATED PRICE ACTION. Since the restoration of its dividend, shares have tended to move approximately 10% in the 2-3 weeks following the ex-div date. These moves were not all to the upside, but the 10% volatility was relatively consistent. This implies a move from $115 to either $104 or $127. Significantly, this defines the January low we discussed earlier, as well as the bottom of the post-earnings gap. Based on the oversold conditions, we would expect this to be toward the upside; however, we cannot discount the possibility of continued downside. During the 2012/2013 correction, during which shares slid into the dividend, the share price continued down. But in each of those three instances, shares saw a very big oversold bounce.

AAPL Div

NASDAQ. It’s always important to look at the broader market when analyzing any specific stock. The QQQ’s have been trading in a well-defined uptrend over the past year. While many discuss the 50 dma, it has not realy been a meaningful indicator over the past several months and we don’t put much emphasis on which side shares are trading on. More importantly, we’re watching the rising channel; unless shares break to the downside, we do not see a significant risk for the broader markets.

QQQ


August 2, 2015 – ORIGINAL POST

Pessimism seems to have reached a fever pitch among Apple investors – even many long-time shareholders. The Apple Watch is clearly a dud. There’s no chance the iPhone 6S will beat last year’s 10 million unit first weekend number. Sales in China are slowing and hitting Apple particularly hard. The Apple TV isn’t going to be the transformative product we hoped it might be. The speculation of an Apple Car means that management is taking its eye off the ball.

We disagree with each of those statements, but these are the kinds of accusations that many knowledgeable and long-time Apple investors are beginning to use to explain the post-earnings price action. Investors are nervous and shares of Apple are now pricing in these low expectations throughout each of their business lines. As the sentiment begins to shift, likely sparked by increasing excitement for the September iPhone introduction, we believe the direction of least resistance is up.

CONSOLIDATION. Since mid-February, shares of Apple have been trading within the $119-$134 range. Strong support exists at the $119 level, and on top of that, the 200dma is sitting just above that level. We expect this support level to hold. That’s not to say shares can’t dip below them for some short amount of time (which we see often and is an institutional accumulation to buy up all the sell orders that are stopped out). Remember, this downtrend has lasted all of 8 days. Looking at the bigger picture, we’re still firmly within the consolidation range.

AAPL 1 - Consolidation

WEEKLY CONSOLIDATION. Here’s a broader picture. You can see several instances of consolidation. This is a longer one than normal, but it’s nothing too extreme that we haven’t seen before. Keep this in mind.

AAPL 2 - Wkly Consolidation

LONG-TERM UPTREND AT RISK? We’ve heard several readers mention the fact that shares have fallen out of the long-term uptrend. That is absolutely true – this uptrend channel is at risk. However, it has not yet been confirmed. We saw this exact same scenario in early 2014, after which shares re-took the channel. Almost every part of this recent price action looks similar to the prior comparison.

AAPL 6 - Uptrend

BOLLINGER BAND COMPRESSION. This one is extremely important to us. Every single time the shares closed at the bottom weekly BBand, shares have rallied 7-10 points (10%+). This price action is very similar to the three instances in 2010 and 2011 (RSI between 45-50, shares at lower BBand, shares closed below 25 weekly ema, BBand width at historical lows). With all of this in place today, along with the fact that the $119 support AND 200 dma are just below current price, we believe the downside is very limited. We are buyers at current levels.

AAPL 3 - BB Consolidation

DIVIDEND TRENDS. We wanted to see if dividend reinvestment had any impact on share price, so we put the following chart together. What we found was a bit of a surprise. Following the dividend (ex-div date), shares either rose or fell 10% within the next 2-3 weeks. The 3 times it fell was during the 2012-2013 crash in share price. It has risen by 10% in each period prior to and after shares stabilized.

AAPL 5 - Div

BUYBACK BLACKOUT PERIOD. Based on Goldman Sachs and the WSJ, Apple has a blackout period on its share repurchase that extends from five weeks before earnings to 48 hours afterwards. We estimated the blackout periods below (shaded grey). From the end of the blackout period to the highs of that period, Apple tends to rise roughly 13% in 3-5 weeks. There were two occasions when the rise was 6%. One was followed by a nearly 17% rise in 5 weeks. The other was last quarter (and we have yet to see how this period turns out).

AAPL 4 - Blackout Period

HISTORICAL COMPARISON: November 2011. Shares of Apple exhibited an eerily similar price structure around the October 2011 earnings report. After testing the 200dma, a rally and gap up to re-test all-time highs was formed leading up to earnings; that gap turned into an island gap reversal when the otherwise strong earnings did not meet high expectations. Shares the consolidated and fell back to the 200dma.

AAPL 8 - Nov11

Once the 200dma was re-tested and support held, shares began a climb back up to all-time highs over the next 5 weeks. Look at the chart below of the recent action before and after the latest earnings release. If support holds at $119, which we do expect it to do, we should see a climb back up to the all-time highs leading into the introduction of the next iPhone.

AAPL 8 - July15

NASDAQ. Lastly, it’s always important to analyze the broader markets when looking at any given stock. The QQQ’s have formed a solid uptrend over the past year and recently hit an all-time high. While most are watching the breadth – which has admittedly been low – during the recent market rally, price is the most important indicator.

CONCLUSION. We will never advocate a “buy and hold” strategy here. It works for many people – but it’s simply not what we do. We try to take advantage of low risk/return opportunities. We held a number of intermediate-term Apple options through earnings – something that we rarely do. One thing that’s important to remember when you own stock or derivative positions is to constantly ask “would I buy here?”. If the answer is no, sell. Otherwise, holding is likely the right move (unless theta burn is an issue on near-term positions). We are buyers – and holders – of Apple here. As always, if Apple does not move as we expect and breaks down below its 200dma and $119 support, our stop losses will be triggered and we’ll be out. Otherwise, we expect to participate as the price action turns around.


Apple 3Q15 (Fiscal) Earnings

July 20, 2015

Here we go again… Apple is set to report its fiscal third quarter 2015 earnings tomorrow afternoon. Our projections for the quarter are below:

AAPL 3Q15

iPhones. We expect 50.5 million iPhone unit sales, representing a 44% annual increase and a 17% decrease from last quarter (which included the Chinese New Year). The ASP will likely remain high at $640 per unit, down only slightly from last quarter. However, there is potential upside here as channel checks have indicated stronger than expected interest in the 6 Plus, which has higher gross margins and ASP.

iPads. Don’t need to spend much time on this one. We expect 10.0 million units at an average selling price of $420 per unit. There continues to be interest, especially on the enterprise side, but we see slowing sales until Apple refreshes this product line.

Mac. We have a relatively conservative estimate of 4.5 million Mac sales at a $1,200 ASP. This is consistent with last quarter and the year ago quarter; however, there may be upside in this category due to the new Macbook Apple introduced this spring.

Software/iTunes. There has been a trend to see a slight decline in software sales between the March and June quarters; therefore we expect $4.9 billion in sales down from $5.0 billion last quarter.

Peripherals/Other. This is where things get fun. Excluding the Watch, we anticipate $1.75 billion in sales in this category (up only slightly from last quarter). We will be watching the gap between this figure and the reported number, which will approximate the revenue generated by the Apple Watch. We’re currently expecting a conservative 3.5 million units at a $550 ASP. This would equate to $1.9 billion in revenues. We have not adjusted our unit projection in over six months, because there’s been a relative dearth of data points that would influence our analysis.

On the ASP side, we currently expect 66% Sport / 33% Apple Watch / 1% Edition. With the Sport, we’re modeling 60% buying the smaller watch at a $350 ASP and 40% buying the larger model at $400 ASP. With the Apple Watch, we are modeling a 50/50 split between model sizes with ASP of $550 and $700, respectively. Lastly, we’re showing 1% purchasing the Edition at an average ASP of $10,000. In our view, these are all conservative ASP projections. There is upside to each aspect of this analysis; until we have more information, we do not want to “count on” more aggressive fundamentals here.

REVENUES / EPS. We are looking for $50.5 billion in revenues and $1.94 EPS, driven by gross margins at 40.5%. This is our base case, which tends to err on the conservative end of the spectrum. We believe there is upside, especially in the Mac and Apple Watch categories. However, as we all know, the most likely category to shift the results significantly from our projections is the iPhone.

Guidance. Our current revenue projection for Apple’s fourth fiscal quarter is $53.8 billion. In order to generate a “beat” roughly equivalent to the previous several quarters, we anticipate management guiding to a range with $50.5 billion as the midpoint and gross margins at 39%.

Management Commentary. We will be getting our first official results on the Apple Watch, which may help to subdue the unfounded “flop” rumors that have been widely discussed. This is Tim’s chance to quiet the peanut gallery (assuming he has good news to share). Management may also discuss user numbers for the brand new Apple Music service and recently launched Apple Pay. While neither of these contribute much to the bottom line at this point, it may help to shift the sentiment and quiet the recent dissent. The more significant questions – from a revenue standpoint – will revolve around any recent shifts in demand from Chinese consumers for the iPhone. The crash in Chinese stocks has led many investors to the conclusion that Apple will take a significant hit. Continued strength and encouraging commentary will likely have a big impact on analyst expectations and may lead to meaningful hikes in 2016 projections… and a higher P/E multiple.

BONUS CHART. Based on our current (relatively conservative) estimates for the June, Sept and Dec quarters, we’ve updated the chart below. In case there was any confusion, it’s clear that EPS expectations drive share price. Investors are forward looking and tend to price shares based on the future six months. As you can see below, investors began pricing in the negative EPS growth roughly five months early – in September 2012. With our EPS expectations through the December report (in late-Jan 2016), shares should continue to appreciate.

AAPL Price and EPS Growth

UPDATE – BONUS CHART #2: The chart below illustrates AAPL’s PE range over the past seven years. Shares of Apple tend to trade within a 4-5x PE range for roughly 18 months before adjusting into a new range. It has recently been trading between a 15x-19x PE range, with most of the action between a 16x-18x range. Based on our expected $8.75 LTM EPS to be reported tomorrow, we’d expect it to trade between $131-$166 (15x-19x) this quarter, with a majority of the price action between $140-$157 (16x-18x). If the share price does not move, it will be trading at a 15.0x multiple come Wednesday morning. If, on the other hand, it keeps the same multiple as today (16.3x), it will be trading at $143.

AAPL PE Range