Is Apple a Worthwhile Investment?

With shares of Apple (NASDAQ:AAPL) trading around $97, is AAPL an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Apple designs, manufactures, and markets mobile communication and media devices, personal computers, portable digital music players, and a variety of related software, services, peripherals, networking solutions, third-party digital content, and applications. The company’s products and services feature the iPhone, iPad, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud, and further accessory, service, and support offerings. Apple also delivers digital content and applications through its iTunes, App, iBook, and Mac App stores.

Apple announced earnings for the third-quarter of its fiscal year 2014, on Tuesday. For the quarter, Apple declared a net income of $7.7 billion or $1.28 per share. This is ahead of analysts’ expectations of $7.49 billion or earnings per share of $1.22. Revenues missed analysts’ expectations however, coming in at $37.4 billion instead of $37.88 billion. Over the quarter, gross profit margin increased to 39.4 percent compared to 36.9 percent a year ago. Apple’s earnings for the quarter were driven by iPhone sales which stood at 35.2 million units, up 12.7 percent year-over-year. However, it was a significant decline from the 43.7 million units sold last quarter.

This can be attributed to consumers holding back as rumors suggest that Apple is preparing to launch a new iPhone in September. iPad sales continued to slump for the second consecutive month as the market faces sluggish demand from North America and Europe. Unit sales fell 9.2 percent after experiencing a 16 percent drop in the second0quarter. Sales for the Apple Macintosh computer grew for the third consecutive quarter, reaching 4.4 million units, an increase of 18 percent from last quarter. In the earnings call call Tim Cook, the CEO of Apple, said revenue growth can be attributed to BRIC nations where iPhone sales increased 55 percent. The biggest contributor was China, which Tim described as “honestly surprising”. Overall sales in China grew 26 percent in the quarter, reaching $5.94 billion.

T = Technicals on the Stock Chart Are Strong

Apple stock has been moving higher over the last couple of months. The stock is currently trading near highs for the year and looks set to continue this path. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Apple is trading above its rising key averages which signal neutral to bullish price action in the near-term.

AAPL

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Apple options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Apple options

21.92%

33%

30%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Apple’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Apple look like and more importantly, how did the markets like these numbers?

2014 Q2

2014 Q1

2013 Q4

2013 Q3

Earnings Growth (Y-O-Y)

19.96%

15.16%

5%

-4.73%

Revenue Growth (Y-O-Y)

5.97%

4.7%

5.65%

4.19%

Earnings Reaction

2.98%*

6.19%

-7.99%

-2.49%

Apple has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Apple’s recent earnings announcements.

* As of this writing

P = Average Relative Performance Versus Peers and Sector

How has Apple stock done relative to its peers, Google (NASDAQ:GOOG)(NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), BlackBerry (NASDAQ:BBRY), and sector?

Apple

Google

Microsoft

BlackBerry

Sector

Year-to-Date Return

18.17%

6.24%

19.82%

33.32%

15.74%

Apple has been an average performer, year-to-date.

Conclusion

Apple strives to provide innovative products and services that consumers and companies love to own. On Tuesday, the company announced second quarter earnings that came in ahead of analysts’ expectations. The stock has been moving higher over the last couple of months and is currently trading near highs for the year. Over the last four quarters, earnings and revenues have been on the rise, which has left investors pleased about recent earnings announcements. Relative to its peers and sector, Apple has been a year-to-date performance leader. Look for Apple to continue to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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