Michael Kramer and the clients of Mott Capital own AAPL
Apple Inc.’s (AAPL) stock has soared in 2020, defying all the odds. It seemed the stock could do no wrong, surging by nearly 25% on the year, and about 60% from its March lows. It leaves the broader S&P 500 in the dust, now just flat on the year, and up about 40% from its lows. But now, there may be trouble on the horizon for Apple as its fiscal third quarter results loom over the horizon, after the close of trading on July 30.
Since reaching nearly $400 on July 13, the shares have fallen by roughly 9% as of July 24. Now it seems that some options traders are betting the stocks significant gains are over, while the technical chart shows the shares have broken a critical trend line. It indicates that the stock could fall by as much as an additional 12% in the weeks to come.
Put Options Rise
On July 24, the open interest for the $330 puts rose by more than 15,000 contracts for expiration on October 16. Additionally, the open interest for the $350 puts rose by more than 10,600 contracts for the same expiration date. When digging into the trades, we find that the $350 puts were bought, and the $330 puts were sold, creating what appears to be a spread transaction. The total spread likely cost the trader $5 per contract. Therefore the stock would need to fall to around $345 by the expiration date for the trader to break even.
The technical chart is flashing the similar warning signs after falling sharply last week. The shares fell below a critical uptrend that formed at the end of March. A break of this uptrend signals a change in direction for the stock, from higher to lower. Additionally, the relative strength index, a key momentum indicator, is now trending lower too. It indicates that momentum is changing from bullish to bearish.
Now the shares are facing a further decline to its next level of support at a price of around $348. Should that level of support not hold, the equity could fall to as low as $328, taking the equity back to its February highs and a decline of 11.9%.
Analysts expect the company to have struggled in the third quarter, with revenue forecast to have dropped by 3.5% to $51.9 billion, as earnings declined 7.1% to $2.03 per share. The weakness is likely to come from Apple’s iPhone unit, which is forecast to see its revenue fall by 13.9% to $22.4 billion. Some of that weakness may be offset by its services business, which is expected to have climbed about 15% to approximately $13.2 billion.
Expectations seem to be high for Apple going into results, especially given that the stock is trading for almost 25 times next year’s earnings estimates. That is the stock’s highest valuation since 2009. It means inline guidance if the company provides any, may be viewed as a disappointment. Currently, revenue for the fiscal fourth quarter is forecast at $61.8 billion, with earnings of $2.80 per share.
Even if this quarter and fourth quarter guidance turns out to be a disappointment, the future for Apple seems as bright as ever. Especially as the company grows closer to the launch of its new 5G phone this fall, and as service revenue continues to increase. It suggests that any pullback in the stock is likely to be only over the short-term.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
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