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Apple reports its March quarter results after the market closes on Tuesday, May 1. The shares have been under pressure for almost two weeks as concerns about iPhone sales, especially for the June quarter, will not meet expectations. Multiple analysts have cut their projections based on supply chain checks and companies, such as Taiwan Semiconductor Company, have provided weaker than expected results or outlooks. (Note that I own Apple shares and have sold Call options).
The iPhone concerns are very similar to what investors experienced in January before Apple announced its December quarter results. Analysts were cutting estimates and lowering their March quarter outlooks, which took the stock down over $11 from its $179 closing high the two weeks before it released results on February 1. In the past two weeks Apple’s share have fallen almost $16 from its $178 recent high and are exhibiting the same pattern as three months ago.
This analysis goes through what the stock did going into the December quarter announcement, how long it took to bottom, how long to recover to its previous high and what level it topped out at. I’ve then compared what the shares are currently doing and how this quarter compares to three months ago. The chart below shows:
- Large blue box: Stock price before and after Apple’s December quarter results were announced on February 1
- Small circle in the box: Where the stock was just before the earnings announcement
- Small blue box: Stock price from its most recent high
- Small circle in the box: Where the stock closed on Friday
- 2 circles in the top section of the graph are the Relative Strength Index, or RSI, just before the December quarter earnings announcement and Friday.
How the stock traded going into the December quarter results
Apple’s shares hit a closing high of $179.26 on Thursday, January 18, exactly two weeks prior to the company announcing its December quarter results. While there had been some analysts expressing concerns about the iPhone outlook before January 18, more analysts cut their March quarter expectations before February 1. Over the next two weeks the stock dropped over $11 or 6.4% to close under $168.
While Apple’s reported revenue of $88.3 billion for the December quarter beat analyst’s forecasts of $87.1 billion, the March quarter guidance fell short. Analysts had been projecting March quarter revenue of $65.7 billion but guidance was (and still is) for the company to generate $60 to $62 billion.
Even though there had been wide concern that guidance could be light, it still hurt the stock. Apple’s shares dropped another $11 plus the next two days and closed at $156.49 on February 5, which is its most recent low. From its high of $179.26 the stock fell almost $23 or 12.7%.
The shares then started their climb out of the hole. It took 9 days to February 14 for them to get back to $167.37, which essentially matched where they were before the earnings announcement.
It then took almost a month, from February 14 to March 9, to claw their way back to the previous high. On March 9 it closed at $179.98 and then rose a bit more. On March 12 it hit a closing high of $181.72 and on March 13, an intra-day high of $183.50.
How the stock is trading going into the March quarter results
Apple’s shares are exhibiting a similar trading pattern, which is being driven by the same concerns as three months ago. Analysts have been cutting estimates, especially regarding their June quarter outlook and how well the iPhone will do even in future quarters.
Nine days ago on April 17 Apple shares hit their most recent high of $178.24, which is $1 lower than the high they hit on January 18. Since then they have fallen almost $16, or 9%, to close on Friday at $162.32. While this is a larger decline than three months ago before the earnings announcement, it is a fairly similar pattern.
Oversold and needs to hold its 200 day moving average
The top portion of the StockCharts.com graph shows the Relative Strength Index, or RSI. As it approaches 30 it indicates that the stock is oversold, but RSI signals tend to only be valid for a few weeks timeframe. As can be seen in the chart below at 36.56 Apple’s shares are fairly oversold.
Another key technical indicator that trader’s use are moving averages. The green line in the chart is Apple’s 200 day moving average, which can be a critical support level, if it holds. While a stock can trade below it for a few days, if it doesn’t get back above it the moving average can turn into a resistance level.
What to expect
While patterns tend to repeat themselves, they do not have to. If guidance is lighter than what investors are now looking for, the shares will probably take another turn downwards.
What could disrupt this pattern will be how large and how fast Apple’s capital return program announcement turns out to be. After Tim Cook declared that the company will become net cash neutral (and it had over $162 billion more in cash and investments and debt at the end of last year) the speed that the company gets to this could be critical in supporting the stock.
Apple’s more than reasonable valuation should also support the shares . Currently analysts are expecting the company to generate $11.40 and $13.07 of EPS in fiscal 2018 and 2019, respectively. This gives the stock PE ratios of 14.2x and 12.4x, respectively.
Assuming that Apple buys back $100 billion of its shares at the current $162.32 price, it will retire over 600 million shares. When using a lower share count the PE multiples become 12.5x and 10.9x, respectively. This should limit a large downside in the shares.
