Monday, July 29, 2013

Apple (AAPL) - Post Earnings Analysis; Risk Paradigm Shift Over; Now the Market Gets It

AAPL is trading $447.59, up 1.5% with IV30™ up 4.8%. The LIVEVOL® Pro Summary is below.

Apple Inc. (Apple) designs, manufactures and markets mobile communication and media devices, personal computers, and portable digital music players, and sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications.

This is a post earnings note -- a follow up the pre-earnings note. You can read that note by clicking on the title, below:

7-23-2013: Apple (AAPL) - Earnings Preview Reveals Lots of Information; But There is No More 'Old AAPL' -- That's Not Good or Bad... It Just is.

I have also written extensively about AAPL prior to that, and you can read any of those recent posts below by clicking on the titles:

4-18-2013: Apple (AAPL) - This Just Isn't the Company it Used to Be... And it Never Will Be Again.

1-23-2013: AAPL - "Just the Facts Ma'am" -- Well, that Supports the Opinion: "Everything has Changed. The Old AAPL is No More."

12-10-2012: AAPL - Everything has Changed. The Old AAPL is No More. The New AAPL is a Riskier Entity and the Market Doesn't Know What that Means Yet.

12-5-2012: Apple (AAPL) - Have We Moved into a Totally New Volatility Paradigm for This Company? Has Everything Changed?

But let's focus on the last earnings report, and then turn to the option market to complete the picture.

Earnings Results from July 2013
EPS: $7.47 vs. $7.31(est)
Revenue: $35.3B vs. 35B (est)
Gross Margin: 36.9% vs. 36.7% (est)
iPhone Sales: 31.2 million units vs. 26.5 million (est); BUT, average selling price down ~ $32.
iPad Sales: 14.6 million vs. 18 million (est)
New Product Release: ? Coming at end of year?

So those numbers don't really mean anything without some words behind them. First, AAPL's big story for along-time for AAPL was gross margins and they have finally broken below the 40% level (which some think is a 'magical' level). Some of that came from depressed iPhone sales prices even though the number of units sold was higher than expected. But.. it's not what you think. iPhone is losinig market share. Here's a snippet from an in article:

Apple's (AAPL) share of the global smartphone market shrank in the second quarter as major rivals like Samsung and LG shipped many more units than the iPhone maker.

Market research firm IDC late Thursday reported that worldwide smartphone shipments rose 52.3% over the year-earlier period to 237.9 million units. Apple, however, posted the slowest growth of the top five vendors at 20%. Apple's market share sank to 13.1% from 16.6% a year ago.

Apple remained the No. 2 vendor behind South Korea-based Samsung, which garnered 30.4% market share on unit shipment growth of 43.9%.

Apple smartphone market share at lowest level in 3 years , written by Patrick Seitz.

The Tablet market (iPad for AAPL) performed well below expectations. But that's not the big news either (IMHO). The biggest news seems to be that the company again (now for the second year) is saving their "big surprise" product news for the end of the year. Some analysts feel last year's move to do the same was a major mistake and may have cost the firm billions in sales. Well, whatever you think, they're doing it again.

None of this is catastrophic, it's just a reminder that AAPL isn't the same company it used to be.. And btw, at $420 billion in market cap, how could it be?

Let's turn to the two-year Charts Tab below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

On the stock side we can see the incredible run to what is now the famous (infamous?) run to $720 and then the drop to at some points below $400. I've highlighted the most current stock price movement simply to point out that the volatility has sort of dried up -- the stock is in a "quiet period," even with two earnings releases. That's an equilibrium.

Let's turn to the two-year IV30™ chart below in isolation, to examine the volatility.

I've drawn that horizontal orange line to show how depressed the implied is right now. The interesting thing is how he option market reflects future risk for AAPL compared to the realized historical volatility (obviously that would be the past).

HV60™: 22.69%
HV180™: 33.53%
HV360™: 30.79%

We can see that the HV60™ (which covers 60 trading days) is really quite low at ~23% compared to the longer term measures. The longer term measures (HV180™ and HV360™)  incorporate the stock volatility as the market in whole was learning that AAPL had become a different company --that the risk paradigm had shifted and no one knew what that meant.

But today, AAPL is no longer seen as the singular technology innovator of the world. It is no longer seen as a stock driven wildly by a new product releases. It's a $400 billion Goliath, that pays a hefty dividend, has a stock buy-back program and just ain't all that sexy anymore -- at least compared to the old days.

The IV60™ (so the risk reflected by the option market for the next 60 calendar days) is 22.15%, almost identical to the HV60™. Finally, it seems, an equilibrium is forming -- smaller stock price movements (see circled part in the stock chart above) and the similarity of HV60™ and IV60™ -- the past risk and the future implied risk are priced the same.

I said before in Dec 2012 that "Everything has Changed. The Old AAPL is No More. The New AAPL is a Riskier Entity and the Market Doesn't Know What that Means Yet." Well, that's over. The market does get it. AAPL is slower, bigger, and without Steve Jobs.  That's now the equilibrium resting point.. finally.

Anyway, that's my take on it...

This is trade analysis, not a recommendation.

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