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China Likely Bruised Apple’s Earnings, But How Much?

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October 27, 2015
China Likely Bruised Apple’s Earnings, But How Much?

Apple’s (AAPL) fiscal Q4 earnings are scheduled to be released late Tuesday and its results—plus what Chief Executive Tim Cook sees on the horizon—could be telling for the smartphone giant and a jittery Wall Street that’s trying to take stock of China’s demand slowdown.

AAPL—the most actively traded stock among TD Ameritrade clients and the No. 1 stock held by both retail and institutional traders at TD Ameritrade in 2014—is coming off a robust year of iPhone sales that some investors worry it won’t be able to repeat.

Apple analysts point out that huge sales jumps logged in the first three quarters were powered by China—sales in Greater China, for example, surged 112% in the last quarter from the year-ago period, accounting for nearly 30% of total sales, according to company data.

Still AAPL’s stock took a dive in late August amid investor worries about China sales. Cook came out and publicly stated on CNBC that AAPL has continued “to experience strong growth” in China and that “China represents an unprecedented opportunity over the long term.” That quelled some of the share price damage and the stock has been climbing since (figure 1).

But China has been a thorn for many multinationals and there are some in the analyst community who think AAPL, too, could see some sales slowdown.

Analysts checking in with Thomson Reuters on average anticipate per-share profit of $1.88 on revenue of $51.1 billion. That’s about a 21% jump over the same period last year and sits about even with AAPL’s guidance to Wall Street of revenue in the $49 billion-$51.1 billion range.

Season of Cheer?

Industry analysts are curious if the conference call will unearth how Apple falls into what Cook said last week was the “massive change” coming to the auto industry. And, with the holidays just around the corner, Cook’s projections of what’s ahead for electronics sales in the busiest shopping season of the year could be noteworthy.

Traders may be braced for a more conservative report. AAPL sits smack dab in the middle of its implied volatility percentile range.  

The short-term options market is pricing in the potential for a 5.8% move in either direction for AAPL around its earnings release, according to the Market Maker Move indicator on TD Ameritrade’s thinkorswim® platform.

We’ve seen 1.5 times the normal option trading volume this week. Noteworthy are active buyers of the weekly Oct 120 calls. On the put option side, the 110 weekly puts are drawing higher-than-usual buyers and sellers.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price and over a set period of time; the same applies to put options, which represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

AAPL-stock-chart

FIGURE 1: TRENDING SIDEWAYS?

Since August 24, when CEO Tim Cook sent a rare update to CNBC amid broad stock market turmoil, AAPL has gained some 15%. It is still off its 52-week high of $133 by nearly 17%. Source: TD Ameritrade's thinkorswim platform. Data source: Dow Jones. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

What Next for Slimmer Twitter?

There’s been a lot of attention on Twitter (TWTR) this month, starting with renaming founder Jack Dorsey to chief executive. He immediately cut 8% of the workforce. That, along with a recent launch of a new product called Moments, has investors eager to hear what the social-media platform has in store for the near and distant future when it reports Q3 earnings after the trading session ends Tuesday.

Twitter could set the stage for upcoming results from LinkedIn (LNKD) and Facebook (FB) and others that compete in publicly traded social media as they work to further grow ad revenue and stay relevant among increasingly picky younger users.

When Twitter’s Dorsey announced that he was streamlining the company by letting go of 300 people two weeks ago, he also told Wall Street that TWTR’s revenue would fall in line or on the higher end of previous forecasts of $545 million to $560 million. So analysts reporting to Thomson Reuters are expecting a 55% jump in revenue over the year-ago period to $559.4 million; they expect profit at $0.05 a share.

Heading into earnings, TWTR’s implied volatility is at the 92nd percentile. Call option buying interest is noted in the weekly 35s. Put activity is negligible.

TWTR stock is off more than 36% in a year-over-year snapshot and down nearly 14% since the beginning of the year (figure 2). There have been small rallies in recent sessions, such as when high-profile business leaders like the Saudi Prince Alwaleed bin Talal and former Microsoft Chairman Steve Ballmer went public with their investment in the firm. Since October 1—two market sessions before Dorsey was given the top job—TWTR stock is up more than 25%.

TWTR-stock-chart

FIGURE 2: IS A TOUGH YEAR TURNING AROUND?

Twitter (TWTR) stock is off more than 36% in a year-over-year snapshot and down nearly 14% since the beginning of the year. Source: TD Ameritrade's thinkorswim platform. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

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