Only time will tell

Apple saw a 27% run between 16 January and 24 February, but has since eased off and some indecision has crept into price action below $130.

Apple
Source: Bloomberg

This strong run was largely assisted by quality earnings (specifically driven by strong and potentially sustained iPhone sales), excellent operating cash flow generation and a platform (such as Apple Pay) from which investors can feel confident of further earnings growth. The pending release of Apple Watch is also creating a buzz in the investment community.

On this point, invitations have been sent out for the 9 March event where the market will almost certainly discover the unveiling of the Apple Watch and the tech giant’s first tilt at the wearables category. There are many questions around the watch, such as the costing structure and battery life. Some will also wonder how much market share Apple can capture in the ever growing competitive wearables space, which could be worth an estimated $12.6 billion by 2018.

There is no doubt Apple is late to the party with the watch. However, when it brings something to market it does it bigger, better and with a touch more class than others and it will bring a whole new brand of customers into this market. As the great man said ‘beautiful is better.’ The question for traders is whether the product will be big enough to really add to the earnings per share consensus with expectations of $8.57 this year and $9.23 in 2016 (on consensus revenue of $225 billion and $236 billion).

It doesn’t seem that investors are overly excited about the watch and are probably more enthused at the potential for capital returns through continued dividend growth (maybe even 15% this year) and potential for $50 billion+ to be returned to shareholders through share buybacks. Sell-side analysts have thrown various estimates around for Apple Watch ranging from 10.5 million to 42 million units sold. However, this will naturally depend on how successful Apple is in convincing the iPhone subscriber base it needs the watch as well.

JP Morgan, for example feel Apple could sell 26.3 million units a year and as result could add an extra $5 to its 12-month price target, which it put (based on its models) at $145. This is some 9% above consensus, although that figure is being brought down by one research house who feel the stock is worth $45.

In conclusion, the watch could help put upside in the stock, although it has been largely speculated on for some time and could be in the price. The question is whether it can overachieve and that could be a short-term catalyst. Technically, the strong momentum is waning and indecision has crept in. The ‘value’ trade is to be long on pullbacks to strong support closer to $120 (as shown on the daily chart), but the 38.2% retracement at $122.76 could act as reasonable support ahead of that. Still, if we look at the 50-, 100- or 200- day moving averages, the medium and longer-term trends are still very much up and this trend should be respected.

A move into $122.76 or even $120 may be too aggressive, especially with the raft of key earnings drivers. We may have to think at a more macro level to see a pullback of this magnitude.

I am also sceptical of brokers' price targets but there is no doubting the tech giant has its mojo back and while the return of capital element is always compelling (albeit expected) in this low interest environment, the market is always keen to see how it keeps the iPhone sales coming, with new products holding additional upside for shareholders. Pullbacks remain buying opportunities in my opinion with many asking whether Apple is going to be the first $1 trillion dollar company.

Apple chart
Click to enlarge

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