Trade Ideas January 28, 2020

Apple Fiscal Q1 Earnings Preview

by Dan

After the close Apple (AAPL) will report its fiscal Q1 earnings, The options market is implying about a $16.50 move in either direction or about 5%, which is a tad rich to the 4% average one-day post-earnings move over the last four quarters.

After gaining 86% last year, the stock is already up nearly 8% this year and just a couple percent from an all-time high last week. The stock is nearly 40% from its 200-day moving average, which happens to almost match the stocks October breakout level to new highs and yielded a parabolic move of epic proportions (in plain English the stock gained a few hundred billion in market cap for NO reason).

 

When I say NO reason I mean it, the company in the trailing 12 months has not grown earnings, sales, gross margins or iPhone units, but because Services, which is a higher margin business is making a larger part of the revenue mix investors have rerated the stock? Yes services are on a run rate to be over $50 billion in 2020, but it is worth noting that their gross margins have yet to best iPhone GMs at around mid to low 60%.  I might also add that if iPhone units are not growing it could materially decelerate the high teen’s growth rate for revenues making it look like a far less interesting business.  Oh and 5G, AAPL will be lucky to have a mass launch of high-end phones that our carriers might not be ready to support coast to coast in calendar 2020. I am not holding my breath on a more expensive 5G upgrade super-cycle.

So for all of that excitement that has yet to be realized, AAPL’s stock rallied 100% in a year and its multiple went from a sleepy hardware multiple of 12x expected earnings to 24x now, a more than decade high:

 

You know what else is through the roof? Short-dated options prices in AAPL, with 30-day at the money implied volatility at 32.5%, in its 97% percentile:

What this simply means is that options prices are expensive for those looking to express directional views via long premium trade ideas.

So what’s the trade?

If you think the company can post a beat and raise then weekly calls could make sense with an itchy trigger finger as I could see the stock gapping up to a new high and then finding sellers as there may not be another incremental buyer on the planet, aside from some shorts…. thats just not my game… but it is important to remember that a 5% implied move on a nearly $1.4 trillion market cap is $70 billion after the stock has doubled in a year, I can see the stock far more likely to lose $70 billion in one day’s trading on an unexpected miss than gain $70 billion on what can only be expected as a beat.

If I were looking for a miss and an unexpected guide lower, possibly on coronavirus as China makes up close to 17% of AAPL’s total sales, I might consider buying a put spread in Feb expiration may be paying $7 for the 310 – 275 put spread, breaks even down at 303 and offers a max payout of 28 if the stock is 275 or lower on Feb 21st. The 4% break-even is within the implied earnings move, and the options market suggests there is about a 30% probability that the trade is in the money, and about a 10% probability right now that the trade is in the money on Feb expiration.

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