The innovative tech giant Apple Inc (NASDAQ: AAPL), saw its first considerable drop in 15 months in January of 2016, as share prices plunged below the psychological mark of $100. While most analysts feel that the trend is temporary, there are others who seriously question the probability of a bounce back up to and over the $125 level.
Fundamentally, the company continues to perform well. The company reported a first-quarter 2016 earnings of $3.28 per share, beating analyst estimates of $3.23 per share. Total revenue was marginally lower at $75.9 billion against analysts’ expectation of $76.54 billion. However, it should be noted that on a constant currency basis, the sales grew by about 8%. The company also sold a record 74.8 million iPhone units.
The forward-looking P/E (price to earnings ratio) of the company is a mere 9. The gross margin continues to remain at a healthy 40.1% against 39.9% reported in the prior years’ corresponding quarter. The company, which returned $9 billion through share repurchases and dividends in the first quarter, is expected to continue with its $200 billion capital return ($153 billion completed) program.
For the current fiscal, the analysts expect only a four percent increase in the company’s top line. Considering the potential of the company and the problem-solving skills of the management, the market expects the target to be achieved easily.
In spite of these positive developments, for the second quarter of fiscal 2016, considering the economic slowdown in China and other international markets, the company had already trimmed down its projected revenue between $50 billion and $53 billion. The forecast is about 10% lower than the prior year’s second-quarter revenue of $58 billion.
The bearish view is mainly because of Apple’s dependence on the Chinese economy, which is currently seeing a slowdown. The company derives about 25% of its revenue from the Chinese market. CEO Tim Cook clearly stated that the second-quarter could be lackluster. However, he warned analysts against using the component supplier data for forecasts. Most of the decline in the share price was a direct result of the negative publicity and forecasts using the supplier data.
Pessimistic traders argue that iPad sales were just above 16 million units, a decrease of 25% from the year-ago corresponding quarter. However, it should be noted that iPad sales contribute to only 9% of the total revenue of Apple. Furthermore, the market expects a boost in sales with the introduction of the iPad Pro in partnership with IBM. It should also be noted that the iPhone 6, unlike the 6S, was a major upgrade thereby resulting in a surge in sales. Thus, a bearish view based on the sales of the iPhone 6S is not justifiable. Considering these facts, it can be argued that fundamentally the stock is a good buy.
Technically, the stock touched a low of $92.35 in January and is currently recovering. Firm support exists at the $95 level. Minor and major resistance exists at 99.80 and 108 level respectively. Considering the overbeaten scenario, the stock is likely to bounce back to about $107 levels in the immediate future. The argument is also strengthened by the fact that the RSI indicator is making a positive divergence as shown in the image below. Thus, a call option with a strike price of $105 can be purchased with an end of February or mid-March expiry.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
