Apple’s Earnings: The Ultimate Survival Guide

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Saturday, July 14, 2012 -- In this chapter, we will cover how Apple's stock tends to perform on earnings regardless of how strong or weak the earnings report happens to be. This report is a historical analysis of how Apple has performed on the day, and weeks following its earnings results. Here, we don't really care about the strength or weakness of Apple's earnings or how the report has impacted the price appreciation of the stock price. Instead, this report focuses very broadly on answering the question: should we hold Apple through earnings? The answer is clearly yes.

Axiom #1: Apple Rarely Sells off on Earnings
The very first thing that every Bullish Cross member should know about Apple's earnings is that the stock very rarely sells off on its results. We're going to show you in great detail how since fiscal Q1 2006, Apple has gapped up on 80% of the earnings reports and the 20% that were down is really very predictable.

Axiom #2: Apple hits High of the Day at the Open of Trading in the Session after Earnings
The second most important thing that every Bullish Cross member should know about Apple's earnings is that in 90% of the cases, Apple immediately hits the high of the day right at the open of trading on the session after it reports earnings. In fact, since the March 2009 lows of the financial crisis, Apple has gapped up on 10 of the last 12 earnings reports. But get this. Out of those 10 reports where the stock did gap-up on the session after earnings, Apple hit the high of the day right at the open in 9 out of those last 10 cases. The last time Apple didn't hit the high of the day right at the open of trading was all the way back in Q1 2010. Every other quarter before that and since then has resulted in Apple opening at the highs of the day, and then selling-off all day long. Sometimes the stock loses 3-4% right off the open. In some cases, we've seen the stock gap-up 5%, lose that throughout the day, and then CLOSE IN THE RED! So sell at the open is the moral of the story.

Axiom #3: Apple Sells-Off b/w 4%-12% over the 4-5 Week Period after the Earnings Gap-Up
The third most important thing that every Bullish Cross member should know about Apple's earnings is that in 9 out of the last 10 quarters, Apple has sold-off anywhere from 4%-12% during the 4-5 week period from the gap-up opening high set on the day after earnings. So the idea here is this. If you sell Apple's stock right at the open of trading the day after it reports earnings, you would have the opportunity to buy it back at a 4%-12% discount, 4-5 weeks later. In Apple's recently reported fiscal Q2 2012 for example, Apple was 11.3% lower from its post-earnigns opening price three weeks later. We will discuss the details of this analysis exclusively in Chapter 2.

Axiom #4: Apple Rallies Double-Digit Gains b/w Week 5 and the Next Earnings Report
The fourth axiom that all Bullish Cross subscribers should nail down cold is that Apple has recorded double-digit gains between where the stock closed five weeks after reporting earnings until the close of trading ahead of the next earnings report in 11 out of the last 12 quarters. So what these four axioms demonstrate is that the best thing to do with Apple is to buy it exactly at five weeks after it reports earnings, hold it until the next earnings report, sell the stock the next day when it likely gaps-up, then buy it back five weeks later. We will discuss this seasonality in very great detail in chapter 3.

But the bottom line here is this. Apple has gapped up on earnings in 80% of the cases. That gap-up is almost always the high of the day in 90% of the past cases. So you want to sell the open of trading because that is likely the high of the day for Apple. But what you will also come to discover is that Apple tends to be something like 4-12% lower than that opening price about 4 to 5 weeks later. But get this. In 91.7% of the past post-crisis quarters -- that's more than 9 out of 10 times -- Apple has recorded double-digit gains between week 5 and the close of trading ahead of the next earnings report. So that means 80% chance of a gap-up after earnings, 90% chance that gap-up is the high of the day, 90% chance you see a 4-12% sell-off between that gap-up high and the next four/five weeks of trading and a 91% chance that you will see double-digit gains from week 5 until week 13/14 when Apple closes ahead of its next earnings report.

This paragraph above generally encapsulates what we need to know regarding Apple's seasonal analysis during the average quarter. I cannot begin to explain how important it is that you have this material mastered. Knowing this material gives you a ton of background information necessary to be able to fully and accurately analyze Apple's technicals, fundamentals, trending and earnings. It also plays a key role in devising short-term spread strategies. The data contained in the tables below is where you will find the nuances of the analysis which will give tremendous color to the different probabilities stated above. As high as these probabilities are, in most cases, the times that things went wrong, they were predictable and explainable. Meaning, we know how and when to listen to this analysis.

For example, what those of you who pay close attention will come to learn is that the reality is Apple simply just always gaps-up on earnings. The six total times that Apple didn't gap-up were the result of extenuating circumstances. There are confounding variables in the analysis. What's more, you will come to learn that some quarters are much stronger than others. Believe it or not, most of the sell-offs that did actually happen, all took place in the same two fiscal-quarters.

In fact, let's take a look at the analysis. The table below shows how Apple's stock has performed on the ensuing session, the ensuing Friday and the ensuing four-week period after it has reported its earnings in every single quarter since 2006. This table shows how Apple has performed on the previous seven fiscal Q1 and Q2's and how it has performed on the previous six fiscal Q3's and Q4's. The yellow highlights in the table represent those days where the opening price was at or very close to the high of the day. Notice how in most sessions where the close of trading was green, the open was pretty much the high of the day.

These tables blow answer two key questions. First, it answers the question of "how often Apple gaps up on earnings." Secondly, these tables answer the question of "what type of move would we have missed or what type of discount would we have gained if we had not played earnings at all." It shows how Apple has performed from the closing price ahead of the results until the next day, that Friday, 1-week, 2-weeks and 4-weeks later. Notice that even though Apple gaps-up 80% of the time on earnings, even if you decided NOT to play earnings at all, the stock was lower than the close ahead of earnings in 61.5% of the quarters since 2006. That means in half the time, you would have had the opportunity at some point over the ensuing 4-week period to buy it back cheaper. Obviously, that's still not anywhere even as close as profitable as holding through earnings, selling it at the open and then buying it back 4-weeks later.

Please notice that these tables have absolutely NOTHING to do with Axiom #3. Remember, Axiom #3 has to do with how Apple has performed AFTER the earnings gap-up has taken place. Meaning, it assumes you held through earnings, sold right at the gap-up the day after earnings and then waited to buy back 4-weeks later. The performance data in these tables below, on the other hand, show how Apple has performed between the close of trading AHEAD of its results and the close of trading the next day, that Friday, 1-week, 2-weeks and 4-weeks later. Axiom #3 has to do with how Apple has performed AFTER it has reported earnings and gapped-up the next day while this analysis below deals with how Apple has performed from BEFORE it reports earnings. It answers the question, "what would we have gained (or lost) by selling Apple at the close of trading ahead of its results thereby not playing earnings at all." So again, we will cover Axiom #3 in more detail in Chapter 2 including publishing tables in support of Axiom #3. Don't confuse what these tables below are demonstrating and what we are demonstrating in Axiom #3 as they are unrelated. Read Axiom #3 more closely.

(Click to Enlarge)

Fiscal Q2 & Fiscal Q3: The Perfect Quarters
Now the first thing you should notice about the ables above is that Apple has never gapped down on fiscal Q2 earnings in over 7-years now. The second thing you should notice is that Apple has only ever gapped down on fiscal Q3 earnings once (Q3 2008) since 2006. And that one time was just ahead of the financial crisis. Things were very bearish back then and the broader market was on a huge slide all summer. So it wasn't really that unexpected to see Apple gap-down on fiscal Q3 2008 earnings ahead of the results.

So in reality, if you simply just discounted the fact that 2008 was an extenuating circumstance, Apple has pretty much never really gapped down on fiscal Q2 or fiscal Q3. Almost all of sell-offs happened in fiscal Q1 (January earnings) and the last two years of fiscal Q4 (October earnings)

All of the Sell-Offs are Due to Fiscal Q1 Mania
What you should also notice is that there are six gap-downs, but seven total red closes. In four out of the last seven Fiscal Q1's, Apple ended the sessions in the red even though it only gapped down on three.

And there's a very simple and straight forward explanation for the weakness after off-of fiscal Q1 earnings. Back during the pre-crisis era, Apple tended to follow a very strict seasonal trend that went even further back than 2006. The stock would skyrocket something like 80% to 120% between the months of July and January (2nd half of the year), head into January extremely overbought and then sell-off on the results. It was clearly a case of Apple following a pattern of rallying during the second-half of the year and then selling-off/consolidating during the second-half of the year. Typically, what we would see is Apple bottom right ahead of fiscal Q3 earnings in July, rally huge between July and January, and then top right ahead of January earnings.

As you will see in Chapter 4, this pattern was far more pronounced during the pre-crisis era than it is during this current post-crisis era. We still see this same pattern in today's market, but it's far less rigid and pronounced than it was back then. Back then, it was so obvious and straight forward. Sell Apple ahead of fiscal Q1 earnings, short the stock for 6-months, cover ahead of July earnings and then buy the stock for the next 6-months. Hugely profitable trade.

In fact, I remember fiscal Q1 2007 like it was yesterday. Fiscal Q1 2005, 2006, and 2008 were very much the same type of result. Yet, nothing exemplified the pattern better than fiscal Q1 2007 because of how flawless the earnings report really was. Fiscal Q1 2007 was the biggest EPS blowout in Apple's history and no other quarter has ever come close either before or after. While Q1 2012 was in the neighborhood, but Q1 2007 is just in a whole different dimension.

Just to give you an idea, the consensus EPS estimate for Q1 2007 was $0.65. The high whisper number was looking for Apple to report $0.80 given Apple's historical pattern. The delusional whisper number was around $0.90 based on nothing. Then those who like to day-dream would throw around comments like "imagine if Apple reportes over $1.00." Back then, Apple breaking $1.00 in EPS was a huge gaol for investors. Anyways, those people who were throwing around the $1.00 estimate were the "beyond delusional crowd." It was what I call the "daydreamer estimate." We all daydream of some incredible blowout number and watching Apple gap-up 15% on the results. Imagine if Apple reports a blowout number in Q3 and Apple gaps up from $630 to $700. That type of daydreaming.

Well, Apple reported $1.14 in EPS in Q1 2007. The stock blew out the daydreamer estimate for the first and only time ever. That would be like Apple coming out in Q2 2012 and reporting $17.00 in EPS when the consensus is at $10.00 and the highest independent is at $13.00. That's what happened in Q1 2007.

Yet, in spite of that, the stock still sold-off. And do you know what's interesting about that? The stock was halted in after-hours because the exchange thought the stock was going to gap-up uncontrollably with the full tropic-thunder blowout. But instead, the stock sold-off. Not because of poor guidance or anything like that. The stock had just gotten too ahead of itself. That is exactly what typically happened in every Q1 between 2004 and 2008.

So three out of the six gap-downs shown in these tables above, can really be written-off as an exclusive Q1 seasonal trend which has already changed in recent years. Those who were in the know back then, knew that the stock was going to sell-off no matter what. Moreover, the fact that those three sell-offs happened in the pre-crisis era sort of reduces their weight given how long ago they were. We're in a whole different environment now. If those sell-offs were the result of a miss on earnings or the result of weak earnings or the result of weakness in a product, that would be one thing. But I know for a fact that each of those fiscal Q1 sell-offs happened for the same exact seasonal reasons.

The Q1 2006 sell-off, for example, put in a high for the year on Apple's stock. I remember Apple reaching $86.40 just before earnings, and it didn't break that level again until October 2006 earnings when Jim Goldman on CNBC screamed about how Apple just devastated analysts estimates. The reason I remember the $86.40 number so clearly is because it took Apple so damn long to take out the highs that every investor had that number on their minds. It was 10-months of Apple trading under $86.40.

Thus, what you should take from this historical lesson is that even though Apple has gapped down in six out of the last twenty-six earnings reports, the reality is, three were highly predictable and for a known reason. You can just simply write those off. They weren't random sell-offs. When you think about it, the reality is this. If you discount those three reports, Apple is really 20 for 23. It has really only gapped down 3 times that weren't the result of Q1 seasonality over the last 7-years. Almost a decade. So is there really that much uncertainty as to what Apple will do on earnings on the average quarter?

The One Fiscal Q3 2008 Sell-Off was Predictable & Excusable
Then we have the sole fiscal Q3 2008 sell-off which though was partly due to weak comments from Apple's management, was mostly the result of skittishness in the markets ahead of the financial crisis. That means, in reality, we have two real sell-offs. Both happened in fiscal Q4. One took place in fiscal Q4 2010 and the other took place in fiscal Q4 2011. The first chart below shows what the S&P 500 was doing ahead of Apple's earnings in fiscal Q3 2008. Notice how extremely volatile the markets were for all of 2008. The second chart shows Apple's performance ahead of the results. Notice how Apple was sitting at multi-month lows on the day ahead of the results. It even briefly lost the 200-day moving average on the day it reported earnings and managed to eek out a gain.

So let's talk about the only two reports which happened in a relatively stable market environment and weren't the result of some distinct, clear and predictable seasonal trend. First, we have the fiscal Q4 2010 sell-off. I remember that one very clearly. It was a simple case of Apple getting way too ahead of itself. The stock rallied nearly $16.00 in the two sessions (5.24%) ahead of the results. It was trading well above its upper B-Band going into the results and was very overbought near-term sitting at an 83.4 RSI. We're talking extremes. Not just a normal pre-earnings rally. The stock had rallied from $235 in late August to a high of $319 going into earnings in October. It was a case of the stock going too far too fast. The report was stellar and the comments out of Apple were promising. The sell-off was very short-lived because of the fact that it was really more technically driven than anything.

Take a look at the two charts below which show just how overbought Apple was ahead of the results in Q4 2010. First, Apple not only gapped-up way above its upper b-band on the daily, it closed near the highs of the day ahead of the results. In just two sessions ahead of the report, Apple went from $302.50 to a close of $318.00. That is a 5.24% move in just two days. What's more, Apple rallied for literally 10 sessions straight ahead of earnings constituting a move of nearly $40.50 or 14.60%.

This after Apple rallied from $235 on August 27 to $295 on September 27 closing lower for only TWO FREAKING SESSIONS in the entire period. In a 20-session rally resulting in a 25.53% gain, Apple only closed lower twice. After a small pull-back, it then rallied an additional 14.6% over a 10-day period ahead of the results. The stock sat at an 83.4 RSI on the daily chart, gapped-up and closed 2% above its upper b-band on the day ahead of its results after adding 5.24% in two days -- and people are surprised that Apple sold-off on earnings? Apple hit a 90 RSI on the 60-minute chart on the day it reported its results. Trust me. If that ever happens again, we're selling ahead of earnings:

Then we have fiscal Q4 2011 which was a legitimate sell-off as a result of Apple falling short of analyst expectations. What you have to understand about the nomenclature on Wall Street is that a company is considered to have "missed" on earnings if it falls short of EITHER (1) its own guidance; or (2) analyst expectations. If a company handedly beats its own earnings estimates but falls short of the consensus estimates of registered Wall Street analysts, then the company is considered to have has "missed" on earnings according to (1) the financial press, (2) big investors, (3) mutual funds, (4) hedge funds, (5) all Wall Street banks, (6) financial accountants, (7) financial analysis, (8) all CFA designated analysts, (9) advanced traders, (10) hedge fund managers, (11) mutual fund managers, (12) sovereign wealth funds, (13) the swaps market, (14) any other money manager, and (15) all other advanced market participants. Apple is only considered to have missed on earnings if it falls short of its own guidance according to a handful of retail investors.

It doesn't matter if it was analyst error or weak earnings. In the market's eyes -- and this will never ever ever ever ever x infinity change A miss of analyst expectations is a miss, end of story. That's why Apple's stock sold-off on fiscal Q4 2011 earnings. Even though the miss was the result of analyst error, and not the result of weakness in sales/margins/earnings, it is still considered a miss.

There's no point in arguing with the nomenclature. You just have to accept the terminology in the industry, or argue with it and get left behind. Arguing with the nomenclature doesn't change anything, nor does it get you anywhere. What you do to rectify it is explain why what happened i.e. arguing why the miss was analyst error and not weakness in the company.

And in this case, the reason Apple missed in Q4 2011 was due to analyst error. But no one in the industry would frame the situation as "Apple didn't miss, the analysts did." That just makes you sound like an idiot who doesn't understand the terminology. No. Apple missed and missed big-time as a result of analyst error. Calling it something else doesn't change the fact that Apple's earnings were lower than the consensus. How does arguing with a fact do anyone any good? The nomenclature isn't going to change just because you want it to. If a company falls short of analyst expectations, it's considered a miss. End of story. It doesn't matter why, it's a miss nonetheless. If analysts want to make a company miss every quarter, they can do that and it would result in the stock selling off every quarter. Go see Dell during a 10-quarter stretch where the stock missed like every quarter.

Ok. So all-in-all, every sell-off could be written-off as being an extenuating circumstances with the exception of Q4 2011 when Apple missed. And even that quarter could have been predicted if you payed very close attention to how far above the consensus was on Apple's revenue. The consensus would have resulted in a miss in every previous quarter since the lows of the financial crisis except for one.

And even if you don't want to write them off, you still have to realize that Apple is flawless in Q2 and pretty much flawless in Q3. Collectively, between fiscal Q2 and fiscal Q3, Apple has sold-off a grand total of 1 time out of the last 13 quarters. That means in 1 out of every 7 years, Apple will sell-off in either fiscal Q2 or fiscal Q3. Pretty damn good odds when playing fiscal Q2 or Q3. The quarters where there should be caution is fiscal Q1 and fiscal Q4. Especially fiscal Q4 given the recent trend of two back to back sell-offs in 2010 and 2011.

37 responses to “Apple’s Earnings: The Ultimate Survival Guide

  1. What are the chances of an earnings miss this time Andy? I read in a fortune article that consensu on iPhone estimate is low 27M but the revenue expectation has gone up at the same time. Is that true? How do you rate the chances of a miss this time? Guess, that could be the only reason for a sell off unless we have a phonomenal 7 day rally leading to a 90RSI again.

    • Part of being of a good investor is being able to use research to arrive at your own conclusions. I’ve provided you with more than enough evidence to arrive at a very obvious and clear-cut conclusion as to this question. It’s really obvious. Here’s what you need to answer that question for yourself:

      1. Why Apple’s Big Miss Doesn’t Matter’t-matter/

      2. How to use Apple’s Guidance to Properly Forecast Apple’s Earnings

      Now you can always find the most up to date and official consensus estimates for Apple’s earnings at Yahoo Finance. Click on “Analyst Estimates” on the left navigation bar on the AAPL page in Yahoo Finance. See here:

      The consensus as of today is as follows:

      1. Apple’s Revenue: $37.41 billion
      2. Apple’s EPS: $10.39

      Now. Here’s what Apple has guided which you can find by clicking on the “Apple’s Earnings” link on the Nav bar or by simply reading the earnings call transcript which can be found at Seeking Alpha:

      1. Apple’s Rev Guidance: $34 billion
      2. Apple’s EPS Guidance: $8.68

      Notice that the analyst consensus estimates for revenue is $3.41 billion above Apple’s guidance. That is exactly 10% above what Apple has guided. Now given what you read in the two articles I’ve linked to you above, what do you think the answer is to that question of yours? You really should read these articles. That’s why I refuse to give you the answer. Because the answer is very much plain given what those two extremely important articles say.

      If you are too lazy and want to cheat, you can read here. But then next quarter, you will ask the same question and I have a good memory and will then absolutely refuse to help. We gave the answer to your question not more than two days ago in BC Live in a very lengthy post. I think it’s better for you to read the two articles above instead as you will then be in a position to be able to answer the question yourself not just this quarter, but every quarter going forward:

  2. Btw, this is an awesome piece!

  3. Great analysis Andy. I’m guessing how far we run into earnings and the gap up will determine how much of Jan 13 options we sell the morning after, keeping some for an upside hedge. Looking forward to the following chapters and perhaps some guidance on a possible late buy Friday or Monday to play this .

  4. Based on what I read above, combined with the link explaining that the previous miss was due to analysts coming in too high (and they’re not too high this quarter), I suspect the chances of a miss are low. AZ, you’ve written an excellent analysis of how to play earnings. I’m looking forward to whatever else you post this weekend.

  5. You do really good work.

  6. Andy,

    Do you think there is any danger of your well documented research weakening this earnings gap up? I figure your subs might just still be a drop in the bucket but if all of us have sell to market orders on the open, would that not have an impact? Also, if Fortune and other blogs pick up your research, more people would do the same and over time this “insider” research value would diminish.

    • jhart — this is a republication of material I already had on the site for a year now. It’s not going to impact anything at all. In fact, Fortune has already written about it before. They’ve covered my analysis on this subject before. Don’t worry too much about the whole “if it gets out there, then it’s no longer useful.” That has proven to not really be the case.

  7. Thanks for the response. I guess the January Effect still happens despite being widely known. Maybe they will call the eanings gap up the Zaky Effect:)

  8. Something I’m not getting is that axiom 3 about the tendency to sell off in weeks 1-5 doesn’t seem to be supported by the table. From the table it seems like in weeks 1-4 apple is closing “green” a majority of post-earnings weeks in almost all quarters… Am I reading this wrong?

    • Well yes — you’ve sort of missed it a bit. No worries.

      If you read it closely, Axiom #3 has to do with how Apple has performed from the earnings gap-up until week 4/5. The tables above, on the other hand, are there to show you how you would have performed if you had not played earnings at all. Axiom #3 shows the performance from the post-earnings opening gap-up the day after the results are reported, whereas these tables show how Apple has performed from its closing price ahead of earnings until week 1, week 2 and week 4. Those are two entirely different inquiries and different performance periods.

      For example, Apple closed at $420.41 ahead of earnings in Fiscal Q1 2012. 4-weeks later Apple was $92.63 above that $420.41 level. It means if you didn’t play earnings, you missed out on $92.63. Now let’s take a look at what Axiom #3 is about.

      Axiom #3 calculates how Apple performed from its gap-up opening price the next day — which in the case of Q1 2012 was $454.44 — and where it closed 4-weeks later. In this case, Apple closed at $513.04. So in Q1, axiom #3 actually failed. It’s actually one of the only cases that it has failed. But here Apple added $58.60 above the $454.44 gap-up opening price.

      Notice how these are two different things? One is calculating performance from the close ahead of earnings while the other inquiry is calculating performance from the gap-up the day after earnings. I would say re-read the article as it is a very important article to read.

  9. Great analyses AZ!! Just reread all your links above.

  10. Murali Mamidi

    Fantastic summary!

    In regards to Axiom #2: Apple hits High of the Day at the Open of Trading in the Session after Earnings –
    This is about the stock price of Apple which does not necessarily correlate to the immediate short term options prices. If there’s a big gap up in stock price, it takes a bit of time (a couple of hours?) for the options prices to go up accordingly, so you may not want to be selling your spreads immediately at the open. More advanced traders probably have some method of getting the best pricing – I usually just wait an hour for options pricing to start catching up and then make a decision. Does anybody have any better tips?

    • Really great article, thanks Andy.

      I’m also curious about the development of option prices right after the gap up. The 25th of July I can’t be at computer at the opening and need to set triggers before – how much time should we allow to get the best pricing? Thanks for any ideas!

    • A couple of related questions for the BC wise ones:
      1. Optimum “Selling at the open” with spreads means a) literally at the opening bell, b)wait 10 minutes for bid/asks to settle down, c) wait/watch for the first hour, sell at the first indication of any drop d) other suggestions ……
      1. Andy has spoken of a) selling at the open on day after earnings, b) that if we gap up to 670+, the market momentum is likely to move up toward 69x-700 before dropping. So do we sell only a portion of what we were planning to at the open, and wait to see if there’s continued upward momentum? And would the rise from 670 to 69x lilely occur intraday on the Wed the 25th (questionable i guess, since open is almost alway high of the day) , or as late as Thurs, Fri or later?
      Or is he meaning that, if premarket goes to 670, its likely to pop open even higher into the 690’s?

      • We will get into that more once earnings gets here. But it is complicated when exiting spreads. It could be worth your while to wait until later in the day. But we will cover it later.

  11. Andy please ignore this if I should know this after being here for a year but based on what you posted as a response to a question above, analyst revenue is 10% above while eps is almost 20%. I was not under the impression that eps expectations were that much higher. Is expected gross margin % that much of a question mark. I may be mistaken but my recollection was that there shouldn’t be that much of a spread.

    • Read the “how to properly use Apple’s guidance” article and you will find that sometimes there could be massive spreads. Look at my EPS expectation. It’s $12+. Apple is not going to report under $12.00.

  12. Andy do you think the 1-5 week sell-off pattern will still hold if we see a major earnings blowout?
    You mentioned 2 major earnings blowouts, one was in Q1 2007, where the stock still sold off despite of the extreme blowout, but that was in the pre-crisis era when the seasonal trend was different.
    the 2nd major blowout happened in Q1 2012, where it gapped up on earnings then continued to rally throughout the whole quarter, .
    so one might conclude that in the current trend the 1-5 week sell-off pattern repeats very frequently but it’s not immune to EPS blowouts, at least not in the same way the previous trend was. although this is all based on 1 observation for each trend, so maybe we just don’t have enough data… What do you think?
    what kind of EPS will you have to see for Q3 2012 to make you rethink the “sell on earnings buyback at week 5” strategy?

    Thanks for the great analysis!

    • noamb — you can’t conclude that we will see the same thing as what happened in Q1 because that was the only quarter that Apple continued to run after earnings and a lot of that had to do with the melt-up in the broader market. What’s more, we had a massive-ass blowout in Q2 2010 and Q3 2011. Both lead to sell-offs after the massive post-earnigns gap-up. Those blowouts were just about as big as Q1 2012.

      Even if Apple reported $15.00 in EPS, even if it reported $22 in EPS this quarter. It will still sell-off because the market is the prime determinative factor in deciding whether the rally will continue beyond the massive gap-up. The gap-up size is determined by the size of the blowout. But what happens after that depends on the market.

      In Q1 2012, the market conditions were prime. The market was going straight up.

      • Andy you used to comment that Apple seemed to retest its high by the Friday after it reports earnings. So if you didn’t or couldn’t get out the day after reporting to wait until Friday. Is that at all in play anymore?

      • I agree with Andy’s comment here, but would add something else AAPL had working to its advantage following the January earnings blowout: Apple’s previous earnings report (October ’11) had disappointed investors, and there was fear that it might do so again. So the January report represented not only an earnings beat but also a huge relief to investors who feared another miss.

        Andy, you wrote a piece on this, didn’t you? I believe you said that whereas Apple normally beat its revenue guidance by 18%, in January we could expect Apple to beat its revenue guidance by even more than 18%. It seems to me that Tim Cook is still sensitive to that experience, and won’t set guidance high enough to tempt analysts to become aggressive, as they were that quarter. (I also think he would say something to guide analysts back down if expectations were running ahead of actual results … say, by publicly mentioning problems in the supply chain or a slowdown in China sales.)

        • Yes. Apple has shifted its strategy to a more conservative stance regarding its revenue guidance. If you look at what happened in Q1 and in Q2, Apple beat its revenue guidance by over 20% each time. So there you have it. Apple has moved to a more conservative position in an effort to keep expectations low and to ensure that Apple doesn’t miss ever again. i have to say that I am proud of Wall Street analysts as they are taking one for the team so to speak. First in Q1 2012, their revenue expectations probably help propel the stock higher. Why? Because their estiamtes were only 5% above Apple’s revenue guidance. So it set Apple up for a blowout. We saw the same thing in Q2. This quarter analysts are at 10% which will allow Apple to blow out earnings again.

          So really, a lot of Apple moving higher on earnings is thanks to analysts playing ball.

  13. Andy, quick question related to the estimated EPS for 2012, 2013 and 2014.

    2012 EPS: 50.54 (80% growth from 2011)
    2013 EPS: 66.14 (30% growth from 2012)
    2014 EPS: 94.18 (42% growth from 2013)

    What do you think is a major threat to 2013 EPS that is growing only 30% from 2012 EPS?
    Can this assumed slow down in EPS be attributed to only global slow down in 2013?


    • There are so many factors that go into that. It depends on the varying degrees of growth in each of Apple’s product lines. The higher the proportion of iPhone sales to iPad sales, the more that revenues finds its way to the bottom line. Don’t’ worry so much about EPS growth. The important thing to look at is revenue growth. EPS will vary significantly from one quarter to the next.

      • Thanks Andy.

        So far I have ASSUMED that the growth in 2013 is going to be in line with last couple of years for the following reasons.

        1) The possible introduction of iPhone5 in China on China Mobile which has nearly 650 millions of subscribers. Even if 5% of them migrate to use iPhone5 over a period of one year i.e. 30 millions subscriber growth in China Mobile alone.

        2) Another assumption is that iPad and iPhone global sales will outsmart any possible slowdown in iPod and Mac sales in 2013. To what extent do you think Mac Book Pro sales will contribute to AAPL revenues in 2013?

        3) Followed by another likely assumption that iPad Mini and Apple TV will be introduced in near future? I know it may be premature to estimate AAPL growth know that they dontt exist yet.

        Correct me if these assumptions make sense at all.

  14. Andy, I feel like the most significant risk this and next quarter is Apple being excessively conservative in its statements regarding the future outlook because of global concerns. I don’t expect they will report less than stellar EPS, but am slightly concerned that they might caution that the slowdowns in Europe, China, and South America could pose significant risks to EPS growth going forward. Two questions:
    1. Any thoughts on whether or not we could have a repeat of the quarter where this happened before and it led to a selloff?
    2. Do you think the increased conservatism in Apple’s EPS estimates is a permanent change, or is more conservative based on a perceived higher risk level, and could return to the previous range at some point?

    AMAZING job the past few months, and happy one year anniversary! (sorry its late, I’ve been busy lately with a move) I cannot express how much I have learned and grown this past year thanks to your efforts.

    • +1

      We have talked extensively at why EPS will not be less than $12, so that should ensure a good beat vs the consensus. But Andy has also said that the market can find any host of reasons why to sell off a stock. So what happens if they guide very conservatively and the market uses that as a reason to sell it off i.e. gap down. I am still concerned how any management team could accurately predict a renewed global slowdown in europe and china and the mania surrounding the galaxy S3. If this has been unexpected, surely management will guide low for the next quarter. In this regard history is a guide but how often in history have we seen the launch of the first *real* iphone challenger combined with an unexpected global slowdown?

  15. Andy, thanks for the meticulous analysis. The next 2 weeks should be interesting — and profitable.

  16. Andy, why not short AAPL weeks 1- 5 after earnings?

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