Apple Pre-earnings Analysis


Apple Pre-earnings Analysis

It has been an eventful couple of weeks for Apple investors leading up to the company’s quarterly earnings today. The stock was hit with downgrades, as multiple analysts slashed their price targets, citing expected weakness in the company’s core product—iPhone sales. Concerns have also been raised about Apple’s presence and ability to penetrate the Chinese market, which remains its biggest market opportunity. Analysts further noted a “lack of compelling artificial intelligence apps” from the company, a concern that has persisted since Apple jumped on the AI wave relatively late with its own version of Apple Intelligence.  

Apple’s lack of recent innovation has led to a sales slump, keeping its quarterly revenue mostly flat over the past twelve months. Although annual revenue remains close to $400 billion, many fear that the tech giant is losing its grip on market dominance and could face increased competition if the lack of innovation continues. The good news for Apple is that it still generates enough capital to develop new products; however, it hasn’t had a major breakthrough since the release of AirPods and the Apple Watch. Its digital reality headsets were somewhat of a flop, and the company has yet to announce anything groundbreaking, which could explain the stock’s six months of flat returns.  

Looking deeper into the fundamentals, Apple’s total liabilities have grown relative to its assets, now standing at $365 billion in assets and $308 billion in liabilities. This is drifting further from the attractive 2:1 ratio investors often look for. However, Apple does have $108 billion in free cash flow, which remains a strong point. With such a large cash reserve, the company has the ability to invest more in R&D, implement additional share buybacks, and increase its dividend to keep investors satisfied.  

As a business, Apple continues to operate efficiently, with financials that earn it a near-perfect score. However, the market is looking for exciting new developments to ease concerns about emerging technologies potentially overshadowing Apple’s dominance. Additionally, investors want to see a stronger presence in China, which could significantly boost the company’s revenue and net income. Net income fell sharply in the last quarterly report, making it a key focus this time around. If it doesn’t show signs of recovery, the stock could face a correction to bring down its expensive P/E ratio of 39x.  

Option Chain Analysis:

Apple’s option chain currently reflects approximately 85% implied volatility for next week’s contracts (2/7), indicating an expected price movement of around (+/-) $13. However, the direction of the move remains uncertain. If Apple fails to meet this expected price movement, many out-of-the-money (OTM) contracts could lose all their value. We have identified key resistance and support levels where Apple’s stock may move following the earnings report.