Searching for the next Apple catalyst

Apple have had a fairly poor record during the week of the Worldwide Developers Conference (WWDC) over the last ten years, falling an average of 3.7% during the period.

Source: Bloomberg

Bearing in mind the S&P 500 has rallied 0.3% on average during the week, one could make the assumption that the market tends to get quite excited about what is likely to be announced and we see a ‘sell the fact’ scenario play out.

It’s worth highlighting, however, that Apple tends to perform well in the weeks after the conference, although this could also be the result of the positively trending S&P 500 and NASDAQ.

Interestingly, this year the tech giant has started the conference on a modestly firmer footing, rallying 0.3% after the announcement into the close. Price action would suggest the various announcements will fail to drive a material re-rating of earnings estimates, although the S&P 500 fell 0.2% during the same period; so we are seeing some outperformance.

What has been announced?

- Apple Music - The streaming service seems to be the key announcement and the fall in Pandora’s share price suggests the news wasn’t fully priced in, despite having been largely speculated on for some time. Apple Music will cost $9.99 a month.

- A detailed look at Apple Pay and a view on the loyalty program and the international expansion.

- New features in iOS 9 designed to enhance functionality on all iPhones and iPads. This should be rolled out to the public in July. One of the enhancements is a ‘low power mode’ that should provide an additional three hours of battery life.

- A new Mac operating system called ‘El Capitan’. Similar to iOS 9, this will be rolled out to the public in July.

- Updates on HomeKit, CarPlay and Swift.

- Greater access to allow developers to work with the Watch’s operating system.

Overall, one gets the impression that these announcements will certainly enhance the Apple product suite and keep the momentum moving along fairly nicely. However, there is clearly no single announcement that is going to drive a major upgrade cycle from analysts, although expectations were set accordingly.

The impact on earnings?

I cannot see the current year-end consensus of adjusted earnings-per-share of $9.00, or sales of $231.94 billion, being revised too greatly. In turn, the current valuation of 14.19 time’s forward earnings (consensus) shouldn’t alter and is currently a 12% discount to the seven-year average. If we look more short-term, Apple trades at a 10% premium to the three-year average, so it appears fairly valued at present.

For what it’s worth, the consensus 12-month price target is $148.95, so there is some reasonable upside if you believe the earnings estimates are correct. In theory, we could see the P/E multiple above 15.5x before anyone says it is getting expensive relative to recent valuations.

Apple report quarterly earnings on 22 July, so the market will get a chance to hear how these developments are progressing.

How to trade the stock?

Apple has been trading in a range of $134 to $122 for much of the year and I would respect this range for now. Naturally, a closing break either side of this range, though, could mean the start of a new longer-term trend, but we will need to see new fundamental news or a big change in the macro backdrop for this to materialise, in my opinion.

As with the S&P 500 and Dow Jones, the 100-day moving average (currently seen at $125.19) seems key for future price action. The market has shown a willingness to support the stock on pullbacks to this average and, given Apple’s strong fundamentals, I see this as the natural point at which to accumulate long positions. Having said this, the 50-day (currently seen at $127.90) seems to be supporting at present.

If we look more short-term, though, momentum is faltering and the MACD highlights this deterioration, with the 14-day RSI also headed lower. The short-term downtrend drawn from the 26 May high is best highlighted on the hourly chart, although I’ve shown this on the daily chart, so the bulls will want to see a break above $129.30 for the top of the range to come into play.

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