Apple traders are betting that the shares will continue to rise

This message is exclusively written for

On February 6, 2019, Apple (NASDAQ 🙂 closed shares at a price of about $ 175, and a year later, those shares are now traded at nearly $ 325. It is clear that many things can change – and quickly.

The impressive leap in the stock has come because investors have increasingly looked at the future of the company, one that entails a more diversified income stream, consisting of the iPhone, services and wearables. But if you thought the stock rally was behind it, guess it again.

Traders are betting that the share will only continue to rise, while some will see it rise even more in the coming month. Meanwhile, the company reported a significantly better quarter in the week of January 27, prompting analysts to improve future earnings and revenue estimates.

Stock betting remains above $ 325

Option traders have made bets in recent days that suggest that Apple's shares will rise in the coming weeks. The open interest rates for the Apple calls of March 20 of $ 325 increased by around 10,700 contracts on February 5. It seems that the trader also sold the $ 325 put contracts, creating a spread transaction, with the open interest for those contracts increasing by nearly 11,500. It bets that Apple's shares will continue to rise and remain above $ 325 in the coming month.


Strong results

One reason why a trader makes this optimistic bet possible is the powerful quarterly results of the company last week, which easily surpass the estimates. Apple reported sales of $ 91.8 billion, which was better than estimates by nearly 4%. Meanwhile, earnings outperformed estimates by nearly 10% at $ 4.99 per share. Due to the huge quarterly results and better-than-expected fiscal forecasts for the second quarter, analysts have significantly improved their forecasts.

As the company reported results, earnings estimates have risen by nearly 7% for fiscal 2020 to $ 13.95 per share, a growth rate of 17.3%. Also, sales estimates have risen by nearly 3.5% to $ 285.6 billion and a growth rate of 9.8%.

A Diversified Revenue Stream

It leaves stock trading with a one-year forward PE ratio of 20.6. That is not a cheap multiple income on an historical basis for Apple. One reason why equities have risen so dramatically over the past year, however, is due to the revaluation of the share because the company has diversified its revenue stream, from one driven primarily by an iPhone to one that has experienced explosive growth in services and portable companies .

(composed of Apple (NASDAQ 🙂 quarterly reports)

During the fiscal first quarter, the company saw strong growth in its service and wearable units with sales up 17% and 37% respectively. The increasing growth led to the two business segments after the iPhone switching to the second and third largest sources of revenue for Apple. Revenue from services grew to $ 12.7 billion, while wearables grew to a total revenue of $ 10.1 billion, bringing the combined revenue to around $ 23 billion and accounting for nearly 25% of the company's total revenue in the quarter, which was higher than the 21.6% for which it was responsible in the first quarter of 2019.

Due to the ebb and flow of the iPhone, the first quarter is probably the low point of the cycle for the combined business units this year, which could mean that services and wearables continue to rise as a percentage of total revenue all year round, and maybe in the longer term.

It is probably the driving force behind the higher PE ratio that investors are currently offering, and if shares return to the pre-profit PE ratio, before the last upward revisions around 21.5, the share could rise to around $ 335.

However, this does not mean that it will be an easy journey for Apple; it is indeed likely that this will not be the case. Especially with a share so strongly tied to headlines related to China, either through the trade war or now the corona virus.

Disclosure: Michael Kramer and Mott Capital's customers own AAPL. Michael Kramer is a financial market strategist and portfolio manager of the Mott Capital Thematic Growth Portfolio.

Mott Capital Management, LLC is a registered investment adviser. The information presented is for educational purposes only and is not intended to make an offer or invitation for the sale or purchase of specific securities, investments or investment strategies. Investments involve risks and are not guaranteed, unless stated otherwise. Be sure to consult a qualified financial adviser and / or tax expert before you implement a strategy that is discussed herein. Upon request, the consultant will provide a list of all recommendations made in the last twelve months. Results achieved in the past are not an indication of future results.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.