REUTERS/Soe Zeya Tun
- Apple is set to release its first-quarter results Tuesday afternoon. It is one of the most highly anticipated reports in years.
- Strategists point out that despite recent volatility and some uncertainty surrounding the upcoming report, shares are not expected to see a particularly large move.
- Apple shares have fallen 33% since their October high of $233.47.
- Watch Apple trade live.
Apple shareholders are gearing up for one of the company’s most crucial earnings reports in years, which is due to come following Tuesday’s closing bell.
The stock has fallen sharply from its recent highs, making its valuation more attractive, according to some Wall Street analysts. Others point out the options market is pricing in a relatively small move for the stock in reaction to its report.
Tuesday’s report comes four weeks after the tech giant warned that its quarterly revenue would be approximately 7% below what it had previously expected, citing weak iPhone sales “primarily” in China. The rare announcement ushered in a chorus of price-target cuts from Wall Street analysts and mounting fears of a broader economic slowdown.
At this juncture, after a 33% drop from its October high, Apple is trading at just 13 times forward earnings, compared with the S&P 500’s valuation of over 15 times. In other words, Apple is less expensive than the broader market right now, by a popular measure of valuation. Erin Gibbs, portfolio manager at S&P Investment Advisory Services, told Business Insider she likes Apple’s valuation at its current level (the stock is held in portfolios the firm advises).
“We know that 2019 is a tough comparable year,” Gibbs wrote in an email on Monday. “It has almost flat expected EPS growth in 2019 and slightly contracting revenues. Apple really needs to beat on top and bottom line so we can be reassured that the 12% growth expected in 2020 can be achieved.
“But this is a tough year for most of the Tech sector. 2019 expected EPS growth for the S&P 500 Technology Hardware & Equipment industry 1.5%. So Apple it not far off from its peers.”
In the past, Apple’s valuation has found stabilization between 10 times and 11 times forward earnings — even in 2016, when the outlook was particularly gloomy and earnings underwent a “significant contraction,” Gibbs said.
Ahead of the report, Apple remains a “great barometer for gauging how investors feel about the market overall,” said JJ Kinahan, chief market strategist at TD Ameritrade.
The widely held name heavily influences indexes and exchange-traded funds, he told Business Insider in an email on Monday — so earnings results carry “not just financial implications but there is a psychological bent to them as well.”
“Given the other reports we’re seeing around Asia, this is one of those situations where there may be more unknowns going forward, which means investors in AAPL could be taking on greater risks,” he wrote. “Investors need to take this into consideration when coming up with their investing thesis for AAPL.”
So far this year, Apple is among the top stocks that TD Ameritrade’s retail investors have bought. That stands in stark contrast to last year’s activity, when it was one of the top names that clients sold. Still, Apple has been the top holding by its retail investors for the past year.
Despite the stock’s volatility in recent months — and particularly its dramatic reaction earlier this month when Apple made its revenue announcement — the options market isn’t implying the stock will see an outsized move on earnings.
The market is pricing in a move of about 5% in either direction, said Chris Jacobson, senior derivative strategist at Susquehanna. That’s essentially in line with the average realized move of 4.4% over Apple’s last eight quarterly reports, he noted.
“Even with the pre-release and the ~10% sell-off in the shares on that announcement, the options market continues to price in notable near-term volatility reflecting continued investor uncertainty,” Jacobson said.
In a separate note to clients on Monday, Susquehanna’s derivative strategists said investors are betting broadly that technology stocks could see particularly outsized moves this week.
“In Invesco QQQ Trust, we’ve seen a trend of ‘tail buying’ over the past few days, implying investor think there could be notably surprise moves in either direction,” they wrote, adding that nearly half of the fund’s holdings, including Apple, Amazon, and Facebook, report quarterly earnings this week.