- Published on Monday, 03 October 2011 15:54
- Written by Jared Levy, Editor, Options Strategies Weekly
I’m not here to tell you whether Apple is a good or bad company. That’s not going to make you money. As a trader, it’s my job to figure out how the masses will act when there is an event such as earnings reports or a product launch.
It’s the ability to understand and calculate the crowd’s mentality that separates an analyst from a successful trader or investor.
I would be lying if I said it was an easy task.
For Apple (AAPL:NASDAQ), the stakes and expectations are high. Even though Apple tends to downplay future expectations, it is an industry leader that must deliver big. The new iPhone launch tomorrow could be a big one for Apple’s stock in the near term, so be prepared.
Does Apple Still Have the Edge on Competition?
The iPhone, which has been out for almost five years now, has a few more adversaries to confront and conquer, and they are serious contenders.
Don’t get me wrong; the iPhone is an awesome product that was a trendsetter in form and function, but iPhone’s innovative design is now the norm and is losing uniqueness and sex appeal. There are several things we have to think about before buying one share of Apple ahead of Tuesday’s (alleged) unveiling of the next generation of its flagship product.
First off, the iPhone accounts for about 53% of Apple’s revenue. That’s a lot riding on one product that is highly scrutinized. It is a huge seller and always exceeds sales expectations, but by how much and for how long?
As cool as the device may be and as innovative as Apple is, the iPhone is being copied and improved upon every single day. The original iPhone was a game changer, but now it’s showing a bit of age and losing its place as the cool, must-have smartphone.
Google, HTC, Samsung, Microsoft and others are doing everything they can to steal the iPhone’s thunder: 3-D phones that have faster processors, more memory, and increased flexibility and functionality are creeping into the iPhone’s market share.
But the secret may not be all in the cool new features. Apple continues to create brand magic, even with Steve Jobs stepping down from the forefront.
Price History (Earnings and Product Announcements)
Looking at the daily chart below you will notice that after every earnings report Apple moved lower before resuming its rise. This demonstrates the irrational exuberance that sometimes gets built into the stock ahead of a report. That said, over time, the stock does tend to deliver gains.
(Each star represents an earnings report.)
From an earnings growth perspective, Apple has been crushing Wall Street expectations for years now. The last report was especially strong, which sent Apple rocketing to $413.45. But the stock almost immediately sold off. Obviously the broad market moving lower has had a negative effect on share prices, but could it also be that expectations and unknowns are on the rise? Let’s take a look.
Examining the results below, you can see that the width of the green bars (gray for future earnings) continue to get broader, this tells me that analysts are painting a less rosy picture because there are now many more variables, competitors and growth hurdles to contend with.
The gray horizontal lines are the actual results reported by Apple.
Will a faster processor, larger screen, thinner body structure and new aluminum back plate really motivate buyers?
Maybe the voice command will do it, but I doubt it will impress investors. I hate to say it, but I don’t see a wow tomorrow.
Because the iPhone accounts for 53% of Apple’s stock value, a product that wows the world could propel the stock even further. But the problem here is that I don’t know what Tim Cook and company could reveal tomorrow that will shock and awe investors and lure new buyers. Apple needs to continue to put its products in the hands of consumers and wrap them into their products and services.
Past Product Announcements
It’s hard to deny the strength of Apple’s stock over the past several years. While it’s common for the stock to spike ahead of an announcement and then pull back, Apple typically resumes its run within a month or so.
What’s unique about this announcement is that the stock is down over the past week leading into tomorrow’s news. This could give investors a reason to buy on the announcement.
Coming into the announcement, Apple finds itself in an interesting situation. The stock is relatively cheap on a P/E basis, trading at just over 11 times forward earnings. It also has a ton of cash and good brand momentum.
What it doesn’t have is a stable market to play in. Without that support and with the way shares have looked recently I believe that $400 is going to be a tough near-term barrier to break through.
I think you will be able to buy the stock cheaper than its current level before the next earnings on Oct. 18.
That said, expect Apple to see another strong quarter. Buy the stock below $375 and sell above $405 until the report is out.
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