See Apple launch a new iPhone model. See lines form at Apple stores. Watch investors run back to the stock.
It feels like old times for Apple Inc. (NASDAQ: AAPL) as the company prepares to report fiscal Q4 results this Wednesday afternoon with the stock recently posting all-time highs. Even before AAPL unveiled its iPhone 11 in September, the company’s shares were on a run that might make the storybook dog Spot feel jealous.
Since the phone’s launch, shares extended their gains to hit a new peak for the first time in more than a year, allowing AAPL to reclaim its mantle as the most valuable company in the world ahead of Microsoft Corporation (NASDAQ: MSFT).
While the iPhone might capture some headlines, China is another elephant in the room as earnings approach. One big improvement in AAPL’s fiscal Q3 from recent quarters was a rebound in China sales. They fell just 4% year-over-year in fiscal Q3 compared with 22% the quarter before. Consider listening for anything CEO Tim Cook has to say on the call about the situation in China and how the tariff battle is affecting AAPL’s operations there.
The way the stock’s been performing lately, it doesn’t seem like investors are too worried about the China situation. Any setback in trade negotiations or new tariffs, however, potentially could tie up the line on AAPL’s parade.
That’s in part because AAPL shares are often seen as a barometer for trade negotiations. In fact, as measured by the Investor Movement Index® (IMXSM)—a TD Ameritrade proprietary index that aggregates Main Street investor positions—retail traders often appear to use AAPL as a synthetic way to play tariffs. When people get nervous about the trade situation, they’ve been sellers of the stock as the news gets worse.
Investors Embrace New iPhone, but Can the Bubbles Stay?
Earlier this year, it seemed like the iPhone had lost some of its luster as sales slumped amid competition, weakness in China, and people simply keeping old phones longer. Some of the zip appears to be back, though few expect any kind of major boom for the product.
Sales growth for the iPhone—which is now almost a teen-ager—could remain slow, many analysts say. The excitement has shifted, they add, toward Services, especially AAPL’s pending
launch of Apple TV+. That product will put the company into direct competition with Netflix Inc (NASDAQ: NFLX) and Amazon.com, Inc. (NASDAQ: AMZN), as well as companies like Walt Disney Co (NYSE: DIS) and CBS Corporation (NYSE: CBS), The Wall Street Journal noted last week.
Still, news around the iPhone sounds better than it did earlier this year when many worried that falling sales could put AAPL shares into neutral or worse. At the start of 2019, AAPL shares were buried down below $160, off about 33% from their 2018 highs. Now they’re above $240. All told, shares were up 58% year-to-date as of late October, though the rise is just 17% year-over-year.
Some of the enthusiasm might reflect AAPL’s advances on the Services front, but you probably shouldn’t overlook the iPhone’s contribution. Earlier this month, an analyst at Wedbush Securities said he believes China demand is tracking roughly 15%-20% above expectations on iPhone 11. He thinks the product could continue to be a major driver of strength over the coming quarters.
Also, an analyst at Deutsche Bank recently raised his AAPL price target, basing that partly on what he saw as iPhone demand that’s tracking better than Street expectations. He added, however, that earnings upside driven by the iPhone is already largely built into the stock price.
Apple introduced the iPhone 11 on Sept. 10 with new colors, a dual-lens camera, improved durability, and a faster A13 chip. Pricing started at $699. The official release occurred Sept. 20, and the next month saw AAPL’s shares rise 11%, bringing back memories of a time earlier this decade when it seemed like each new iPhone iteration was accompanied not just by long lines at Apple Stores around the world but also quick leaps in share price.
That hadn’t been the case too often in recent years as AAPL faced heavy competition and as customers seemed happy to keep their current phones longer. We’re only a month into iPhone 11, so it’s probably too early to know if this initial zest has staying power. The irony is, a lot of analysts said a few quarters ago that AAPL probably couldn’t generate much excitement with new iPhones until it launches ones with 5G capability.
The iPhone 11 doesn’t have 5G, and 5G might not be available in any AAPL phone until a year from now, trade media reports say. Timing around that launch could be something AAPL executives get asked about on Wednesday’s earnings call.
Figure 1: SEE YOU LATER! The Nasdaq (COMP-purple line) has had a great 2019 so far, but Apple shares (AAPL-candlestick) left the broader index behind months ago. As this year-to-date chart shows, AAPL shares began pulling away around mid-year and haven’t looked back. Data Source: Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Apple TV+ to Launch Right After Earnings
Although phones helped whip up excitement around AAPL shares the last few weeks, that’s definitely not the whole story. Services, which the company emphasized as a key growth driver in recent quarters, also continues to be a focus area.
It arguably starts with Apple TV+. The call gives investors a chance to get the latest updates on launch, scheduled for Nov. 1. Back in September, AAPL announced that Apple TV+ would cost $4.99 a month (with a 1-week free trial). Apple also announced that it would be giving away a year of Apple TV+ to anyone who bought a new iPhone, iPad, iPod touch, Mac, or Apple TV beginning that same day.
While some analysts argue that it will be tough to make any major earnings inroads with Apple TV+ at the beginning, the company does have a major advantage over competitors in one sense due to its product infrastructure. There are more than 900 million iPhones out there, AAPL said earlier this year.
And the user base is pretty entrenched. As one analyst noted last month on TD Ameritrade Network, Apple’s device network is like a famous insect trap—users go in and they don’t leave. That means there’s potentially a huge audience for Apple TV+, especially with the company giving the service free for a year to people who buy new devices.
Last week, Morgan Stanley (NYSE: MS) analyst Katy Huberty created a stir by saying she disagrees with the prevailing view that AAPL is entering a new, more capital intensive market with a low probability of generating a positive return through its launch of Apple TV+. She sees the streaming-video service boosting Services revenue growth by 2 points in fiscal 2020 and contributing an incremental $3 per share to AAPL’s sum-of-the-parts valuation.
“With an attractive price point at $4.99 (per) month, and wide initial distribution to the Apple installed base via the free year offer, we estimate Apple TV+ can become a $9 billion revenue business with 136 million paid subscribers by FY 2025,” Huberty wrote.
Can Record Services Results Repeat?
Fiscal Q3 results reported in July featured record revenue from Services, accelerating growth from Wearables (which includes products like the Apple Watch), strong performance from iPad and Mac, and significant improvement in iPhone trends, AAPL CEO Tim Cook said in a press release at the time. AAPL said in the Q3 release it expected 2019 Q4 revenue of between $61 billion and $64 billion.
In fiscal Q3, AAPL beat third-party consensus views for both revenue and earnings, but Services and iPhone revenue both came in just shy of Wall Street’s projections. Still, shares rose 4% on the news. Investors apparently liked AAPL’s Q4 revenue guidance, which was above expectations at the time.
During that quarter, iPhone sales represented less than half of AAPL’s revenue for the first time since 2012. Overall iPhone sales fell 12% in fiscal Q3 from the same quarter a year earlier. It could be interesting to see if there’s any improvement there in Q4. Anyone hoping for a fiscal Q4 impact from iPhone 11 will probably be disappointed, however. The quarter only included about a week of iPhone 11 sales, so any impact from the product might not show up until fiscal Q1.
If AAPL can continue to grow overall revenue (which it did by 1% year-over-year in fiscal Q3) even as iPhone sales fall as a percentage of revenue, it might mean they’re showing some ability to replace lost iPhone revenue with revenue from things like Services. Fiscal Q3 was arguably the first solid evidence of that happening, but we’ll see if they can make a second shot on goal in Q4.
Apple Earnings and Options Activity
When AAPL releases results, it is expected to report adjusted EPS of $2.84, down from $2.91 in the prior-year quarter, on revenue of $62.91 billion, according to third-party consensus analyst estimates. That revenue would be about even with the same quarter a year ago.
The options market has priced in about a 4.1% stock move in either direction around the upcoming earnings release. Implied volatility was at the 32nd percentile as of Tuesday morning.
Looking at the Nov. 1 weekly expiration, call options have seen the highest activity at the 250 and 255 strikes. Put volume is heaviest at the 240 and 245 strikes.
Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.
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