“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, February 04, 2019

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

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"Trading Capital Management"



Option Trade – Apple Inc. (NASDAQ:AAPL) Calls

Monday, February 04, 2019

** OPTION TRADE: Buy the AAPL JUN 21 2019 180.000 CALL at approximately $5.00. Place a pre-determined sell at $10.00.

Also include a protective stop loss of $2.00.

Tech heavyweight Apple Inc. (NASDAQ: AAPL), a company that designs, manufactures and markets mobile communication and media devices, personal computers, and portable digital music players, and a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications, made quite a comeback since it reported better-than-feared earnings; but slowing smartphone demand continues to be a concern.

However, a slew of new services launching in 2019, including video streaming and a media bundle should be a big driver for Apple.

Apple plans to debut its video streaming service this spring, and it is expected that the tech giant will introduce a "media bundle," which contains video streaming, Apple Music and the Texture news app. As well, an expansion of Apple's payments and advertising business is also on the horizon.

The media bundle could add about 2 percentage points annually to services revenue growth through 2025, helping to drive 5 percent revenue and 12 percent earnings per share (EPS) annual growth rate through 2023.

Also, more share repurchases from Apple this year, which could offer additional support to the stock prices, are expected.

About Apple…..

Apple Inc designs, manufactures, and markets mobile communication and media devices, and personal computers. It also sells various related software, services, accessories, and third-party digital content and applications. The company offers iPhone, a line of smartphones; iPad, a line of multi-purpose tablets; and Mac, a line of desktop and portable personal computers, as well as iOS, macOS, watchOS, and tvOS operating systems.

Past Performance…..

Apple reported earnings for its December quarter Tuesday that largely fell in line with expectations. The results were better than feared, as the tech giant had lowered revenue projections for the quarter on a sales slowdown in China.

Shares of Apple have risen more than 7 percent since the release of the earnings.

Moving Forward…..

The slowdown in iPhone sales is currently causing Apple's overall revenue and operating income to decline, as iPhones account for more than 60% of the company's revenue.

However, all of Apple's non-iPhone businesses grew last quarter. One particular bright spot was the services segment. Investors and analysts tend to like service companies much better than device companies, since services are often distributed as subscriptions, producing the consistent recurring revenue that investors love.

While Apple's services business produces a rather small portion of its revenue today (12.9% last quarter), a growing, high-margin services business is highly attractive to investors due to…..

  • ….. growth - Apple's services division revenue rose 19% last quarter. CEO Tim Cook also revealed that Apple is growing its services business across geographies -- even reaching an all-time high in China, where the iPhone is struggling. That's because the services segment is tied to Apple's installed base, not iPhone sales in any particular quarter.
  • ….. subscription businesses. Not all of Apple's services division is made up of subscriptions. Yet between iCloud, Apple Music, AppleCare, and other offerings, subscriptions make up a meaningful percentage of the services division. The company now has 360 million paid subscriptions -- up 120 million year over year.
  • …..gross margin, which came in at an impressive 62.8% last quarter. This margin figure expanded by 170 basis points quarter over quarter and 450 basis points year over year, which is also encouraging. That seems to indicate that Apple's services gross margin can continue to expand, though it may not happen every single quarter.
  • ….. diverse revenue streams, which are usually awarded higher valuations than businesses dependent on a single customer or product. One impressive feature of Apple's services business is its diversity, spanning iCloud, AppleCare, Apple Music, Apple Pay, and App Store commissions and advertising.

Moving Forward…..

Shares are still down roughly 30% from their high, even after a recent pop on the heels of the company's first-quarter earnings results. iPhone sales fell roughly 15% in the December-ending quarter, owing largely to slowdown in the Chinese market, but revenue for the services segment climbed 19% from the prior-year period. That's the big dynamic investors are looking at -- whether the company can successfully pivot to a more software-oriented business amid softening demand for its handsets.

Apple's handset sales have been impressively resilient even though the progression of the iPhone's design and features has been decidedly more iterative than revolutionary. 5G compatibility, increased augmented-reality functionality, and significant battery performance improvements are just some of the more substantive additions that on the horizon that could be significant positive catalysts. There's also potential in the company's wearables, home, and accessories segment -- which saw a 33% year-over-year sales increase last quarter and could still just be scratching the surface of those markets.

Analysts Opinions

Apple‘s stock had its “buy” rating reiterated by JPMorgan Chase & Co. in a research report issued to clients and investors on Friday, January 11th. They currently have a $228.00 target price on the iPhone maker’s stock. JPMorgan Chase & Co.‘s target price suggests a potential upside of 36.92% from the company’s current price.

Also, Morgan Stanley set its 12-month price target for Apple at $211, which is 27 percent higher than Friday's closing price yesterday.

Several equities analysts have recently commented on the company…..

  • UBS Group set a $185.00 price objective on shares of Apple and gave the stock a “buy” rating in a research note on Monday, January 28th.
  • HSBC downgraded shares of Apple from a “buy” rating to a “hold” rating and reduced their price target for the company from $200.00 to $160.00 in a research report on Wednesday, January 9th.
  • Daiwa Capital Markets set a $200.00 price target on shares of Apple and gave the company a “buy” rating in a research report on Friday, January 4th.
  • ValuEngine downgraded shares of Apple from a “hold” rating to a “sell” rating in a research report on Friday, January 4th.
  • DA Davidson reduced their price target on shares of Apple to $260.00 and set a “buy” rating for the company in a research report on Thursday, January 3rd.
  • Finally, New Street Research raised shares of Apple from a “reduce” rating to a “neutral” rating in a research note on Thursday, January 3rd.

Three analysts have rated the stock with a sell rating, twenty-four have assigned a hold rating and twenty-one have given a buy rating to the company’s stock. The company has a consensus rating of “Hold” and an average target price of $191.66.

Summary

With the company's forward price-to-earnings ratio depressed to roughly 13.5 and its dividend yield elevated to 1.9% and more substantial payout growth likely on the way, the strength of Apple's combined hardware and software ecosystem makes this options trade applicable.

AAPL has a quick ratio of 1.09, a current ratio of 1.12 and a debt-to-equity ratio of 0.87. Apple has a 52-week low of $142.00 and a 52-week high of $233.47. The company has a market cap of $818.47 billion, a price-to-earnings ratio of 13.98, and a price-to-earnings-growth ratio of 1.68 and a beta of 1.13.






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