Apple (AAPL) Fiscal Q1 Earnings Preview

by Dan January 29, 2019 12:43 pm • Trade Ideas

Apple (AAPL) will report its fiscal Q1 results tonight after the close. The options market is implying about a 5% move in either direction or about $11, which is only a tad rich to the average one-day post-earnings move of 4.3% over the last four quarters, and the 4.5% average move over the last ten years.

The options market is implying about a 4.5% move in either direction, this after the stock has rallied about 10% since its Jan 3rd post-pre-announcement low, yet still down 33% from its all-time high made on October 3rd. Near term, the stock has mild technical resistance at $160, with what looks like clear skies up to $180, while $150 down to $140 appear to be sound technical support:

 

Back on Jan 2nd AAPL CEO Tim Cook issued a statement to investors, just two months after giving fiscal Q1 guidance that the company would miss those estimates, its first revenue warning in more than 15 years:

Today we are revising our guidance for Apple’s fiscal 2019 first quarter, which ended on December 29. We now expect the following:
-Revenue of approximately $84 billion
-Gross margin of approximately 38 percent
-Operating expenses of approximately $8.7 billion
-Other income/(expense) of approximately $550 million
-Tax rate of approximately 16.5 percent before discrete items

Cook highlighted no shortage of issues for the sales miss, from a strong dollar to staggered rollout of new phones to supply chain constraints, to elongated iPhone upgrade cycles, but the issue that most investors and market pundits keyed on was China:

we expected economic weakness in some emerging markets. This turned out to have a significantly greater impact than we had projected.

It strikes me that Sell-Side Hold ratings equal that of Buy ratings for the first time in a very long time, per Bloomberg:

 

One of those Buy rated analysts, Katy Huberty from Morgan Stanley noted a tad bit of caution into the print in a research piece to clients this past Friday, with key questions to be answered; why the deceleration in Services revenue and will the issues adversely affecting sales in the last quarter continue into FQ2?:

Earlier today, tech newsletter The Information took a look at AAPL’s Services business, and “the growing importance… once considered a sideshow for the company. They brought in $37.2 billion in revenue during fiscal 2018 or 14% of total revenue”:

 

So we are going to get less transparency on iPhone unit sales and more on Services, that will show a higher level of profitability than their hardware, but its growth is reliant on the growth of their installed base, which is stalling.

MY TAKE INTO THE PRINT: On Jan 2nd I was shocked at the lack of visibility the company had when they had given their Dec quarter guidance on Nov 1st, one month into the quarter. While the stock had already sold off nearly 30% from Nov 1 to Jan 2nd, likely already incorporating negative investor sentiment, I would also be surprised if the conditions that caused the Dec quarter miss abated to the point that gave the company enough visibility and thus confidence to raise expectations for the current quarter.

It would take another meaningful guide down for the company to outperform the implied move to the downside.

It would take a very unexpected beat and raise for the stock to outperform the implied move to the upside, and that I suspect would be an opportunity for skeptical longs to trim their positions.

The most likely outcome is that the stock is up or down in the range of the implied move.

But given investors inclination on misses to shoot first and ask questions later, hedges for longs might be in order… for instance:

VS 100 shares long at $156.50 Buy Feb 165 / 146 collar for even money

-Sell to open 1 Feb 165 call at 1.80

-Buy to open 1 Feb 146 put for 1.80

Break-even on Feb 15th expiration:

Profits of the stock up to 165, stock called away above that, but the long holder could always cover the short call for a loss to keep the long position in place.

Losses of the stock down to 146, protected below that.

Rationale:if you are long, more worried about a downdraft between now and Dec expiration, than a breakout to new highs, then this hedge idea makes sense for those looking to hold onto the position into the new year but want to define their risk to the downside.

 

Or for those looking to play for a bounce with defined risk consider call spreads targeting a breakout above $160:

Bullish Trade Idea: AAPL ($156.50) Buy March 160 / 180 call spread for $4.50

-Buy to open 1 March 160 call for 5.10

-Sell to open 1 March 180 call at 60 cents

Break-even on March expiration:

Profits of up to 15.50 between 164.50 and 180 with max gain of 15.50 above 180.

Losses of up to 4.50 between 160 and 164.50 with max loss of 4.50 below 160.

Rationale: this trade breaks even up 5% (about the implied move for earnings), offers a 3 to 1 potential payout if the stock is up at 180 on March expiration.

 

Or If I were inclined to play for a miss and guide lower I would merely use weekly put spreads, risking what I am willing to lose, for instance:

Bearish Trade Idea: AAPL ($156.50) Buy Feb1st weekly 155 / 142 put spread for $3

-Buy to open 1 Feb1st 155 put for 3.50

-Sell to open 1 Feb1st 142 put at 50 cents

Break-even on Febst (Friday) expiration:

Profits of up to 10 between 152 and 142 with max gain of 10 at 142 or lower.

Losses of up to 3 between 152 and 155 with max loss of 3 at 155 or higher.

Rationale: this is a 3 day trade, risking 2% of the stock price that the stock will be down at least 2.9% this week with the potential to make up to 6.4% of the stock price if the stock is at or below $142.

 

Estimates from Bloomberg:

Just the Numbers
* 1Q revenue estimate $83.97 billion (range $83.06 billion to
$84.59 billion); forecast on Jan. 2 of $84 billion
* 1Q GAAP EPS estimate $4.17 (range $4.13 to $4.27)
* 1Q gross margin estimate 38%; forecast 38%
* 2Q revenue estimate $58.97 billion (range $54.90 billion to
$64.19 billion)
** Services revenue estimate $11.1 billion (5 estimates compiled by Bloomberg News)

iPhone Estimates
* 1Q units 64.8 million (4 estimates)
** ASP $806
* 2Q units 42.1 million (4 estimates)
** ASP $741

 

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