Wednesday, September 11, 2013

Apple (AAPL) - Part 7 (The End): This Just Isn't the Company it Used to Be... And it Never Will Be Again.

AAPL is trading $467.49, down 5.5% with IV30™ down 5.2%. The LIVEVOL® Pro Summary is below.

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This is the seventh and likely final note in a long series surrounding AAPL, which I first started on 12-5-2012. You can read the prior six articles by clicking on the links below -- the titles however kind of do the trick and I will do a re-cap before moving forward to today's news and stock drop.

Apple (AAPL) - Have We Moved into a Totally New Volatility Paradigm for This Company? Has Everything Changed?

Apple (AAPL) - Everything has Changed. The Old AAPL is No More. The New AAPL is a Riskier Entity and the Market Doesn't Know What that Means Yet.

Apple (AAPL) - "Just the Facts Ma'am" -- Well, that Supports the Opinion: "Everything has Changed. The Old AAPL is No More."

Apple (AAPL) - This Just Isn't the Company it Used to Be... And it Never Will Be Again.

Apple (AAPL) - Earnings Preview Reveals Lots of Information; But There is No More 'Old AAPL' -- That's Not Good or Bad... It Just is.

Apple (AAPL) - Post Earnings Analysis; Risk Paradigm Shift Over; Now the Market Gets It

Here's a recap of all of those posts in order from oldest to newest.  But, one thing to keep in mind about today... the stock is down big and the volatility is also down... remember that fact, it matters...

This is a vol and stock note on the largest company in the world. I see a potential paradigm shift in the way the option market reflects risk in APPL -- and the shift is not trivial. I'll even call on your knowledge of Econ 101 from your college days.

Here's what really caught my eye. The most recent closing low in stock price was on 11-15-2012 when AAPL closed at $525.62. At that time, the IV30™ was rising and hit 32.55%. Shortly thereafter, we can see the stock rise again, only to now start another downward trend. But, with the stock $20 lower then than it is today and in what for all intents and purposes was an absolute free fall from an all-time high (see the chart again), the implied only hit 32.55% on 11-15-2012.

But now, with the stock having already reversed the straight down move from the all-time high, and now headed on a new downward trajectory (after a small recovery), the vol has expanded (increased) significantly more to over 36%. So we see a $20 higher stock price now, with a free fall having ended, yet the implied is now higher than it was during the free fall. In English, the risk reflected by the option market has shifted -- it's higher.

Vol can behave much like demand (in fact, vol is demand for protection (puts) or speculation (calls)), where there can be an increase in quantity demanded (that's moving on the same demand curve to the right) and an increase in demand (which is a totally new demand curve drawn above the prior one). I've included a contrived picture of some "widget" demonstrating the difference in an increase in quantity demanded (moving from one red dot to the other) and an increase in demand (moving from blue Demand curve D to red Demand curve D'), below.

IMHO, AAPL is seeing a new demand curve (i.e. vol) -- we're no longer moving on the same vol curve and have moved to a new (higher) one. Like the difference between an increase in quantity demanded and an increase in demand, AAPL is showing a brand new risk curve -- a new paradigm if you will -- and it reflects higher risk.

This will be an interesting one to watch. If the hypothesis is correct, AAPL will be at elevated vol levels relative to the past in all situations (going up, standing still and going down). Those situations could (should) include earnings.

The article today will focus on the same topic -- but with empirical evidence not from the implied volatility side (forward looking), but from the historical realized volatility side (backward looking).

Now to the historical vol measures.  First, I have included the HV180™ chart and below that the HV360™ chart for AAPL over two-years. Note that HV is measured in trading days (not calendar days like implied vol), so HV180™ represents an average of ~9 months of data and HV360™ represents an average of ~18 months of data. So, in English, these are long-term trends not affected by short lived stock volatility.



I've drawn that yellow horizontal line to make it easier to see the high. What we can see here is that AAPL is now at multi-year highs for the very long-term HV180™ and HV360™ measures.

A fair question to ask, is, "how does this compare to the broader market?" Of course, the rationale being, if AAPL is mirroring the overall market, then this is not a firm specific trend, it's a coincidental data point.

Below I have included the same two charts, but have added the long-term HV for SPY as well.

AAPL HV180™ vs SPY HV180™

AAPL HV360™ vs SPY HV360™

I've highlighted the growing vol difference for both measures. The long-term HV measures for AAPL are rising as the SPY long-term HV measures are flattening. It bears repeating that the charts we're looking at here comprise of 9 months and 18 months of closing stock price data -- these are not averages that move easily with the blowing of the wind. These are very long-term measures for the largest company in the world.

The bottom line, in my opinion, whether it's b/c of the loss of Steve jobs, or a variety of other technology specific reasons (or all combined), AAPL is no longer the AAPL we once knew. The implied volatility (option market forward looking measures) bear this out, and the empirical historical stock movement bears it out as well.

On the stock side we can see that AAPL is trading near a six-month low if not for a small recent rally into the earnings announcement today.

On the vol side we can see that the implied has been rising into the event, but in sort of empirical yet circumstantial evidence of my prior hypothesis that AAPL is in fact a totally different entity than it was a year ago (or whatever), we can see the implied is trading higher than the last eight earnings announcements. Note the blue "E" icon on the stock chart indicating earnings.

Last eight earnings announcements (IV30™):
Today: 42.27%
12-25-2012: 36.79%
7-24-212: 34.99%
4-24-2012: 40.43%
1-24-2012: 32.35%
10-18-2011: 37.58%
7-18-2011: 32.06%
4-20-2011: 27.51%

The option market is reflecting greater risk into this earnings release than all the ones before (All = last eight quarters) b/c people are staring to catch on. There's more uncertainty, it's scientifically observable (i.e. a phenomenon).

We can see the stock has fallen 45% from its all-time high and ~25% since the Dec articles. The stock is now at an annual low and has made consecutive annual lows for the last several trading sessions.

Let's turn to the vol side, where I re-iterate my belief that the old AAPL is no more...

I have highlighted in yellow the IV30™ for the last four earnings cycles and the level as of today. The implied is trading higher than all prior four earnings cycles and is still a few days away from the next earnings release. In fact, though it is not pictured here, the vol is higher than prior five earnings cycles. In English, the vol should continue to climb into that 4-23-2013 date.

So, I see continued annual highs in vol every trading day moving forward until the earnings release barring any reports from the firm or any research firms which sort of break the "silence" of news. But, what about the overall market?

The VIX is sitting at 17.81% today. Here is the VIX on the date of the prior five earnings cycles for AAPL:

1-24-2012: 18.91%
4-24-2012: 18.10%
7-24-2012: 20.47%
10-25-2012: 18.12%
1-23-2013: 12.46%

So, with the exception of last Jan's earnings release, the market vol (VIX) has been higher than the current level while at the same time AAPL's implied into earnings has been rising. So VIX was lower, but APPL vol was higher.

In my opinion, AAPL simply is becoming Microsoft. A massively successful, free-cash flow machine that in many respects is a technology laggard rather than leader. When Bill Gates stepped aside as CEO, MSFT had its issues. With the passing of Steve Jobs, AAPL has its issues too. But the evidence reflects the same conclusions as before with one exception.

Last time I said:
"The old AAPL is no more. And new AAPL is a riskier entity -- so says the option market and so says the empirical historical long-term stock returns.

This is a different company -- and the market doesn't know what that means yet."

Now I say:

This is a different company -- and the market DOES know what that means. That's why it has lost more than $200 billion in market capitalization and continues to breach new highs in volatility even with a lower VIX.

There will be ebbs and flows and certainly AAPL may be due for a bounce -- earnings could be awesome... but this isn't the company it used to be... it just isn't... and it never will be again.

The point of all of the stuff before, although I used a great deal of detail, was simply to say that AAPL is a different company than it once was. The price drop and volatility movement show that -- it is tautological.

Now we look at the stock on the day of its earnings release, and we will see yet again, that AAPL is a different company. It is no longer seen as the technology innovator of the world. It is no longer seen as a stock driven by a new product release. It's a $400 billion Goliath, that pays a hefty dividend and just ain't all that sexy anymore -- at least compared to the old days.

Let's turn to the two-year IV30™ chart in isolation, below.

The blue "E" icons represent earnings dates. I have circled the IV30™ levels for the prior seven earnings cycles and as of the close on Monday. Then I've drawn that horizontal line from the current vol level back in-time so it's easy for us to see how depressed the current vol is all prior seven earnings cycles. In fact, on an annual basis, as of Monday's close, AAPL's IV30™ is in the 38th percentile -- so it's depressed to it's own history over the last year by a fair amount (the 50th percentile would be the median).

So what? It ain't about the iPhone 926 or the iPad 1456 or the iGlases 1 or whatever... This is a stock that pays a 2.8% dividend, has announced a stock buy-back and has and HV30™ of 20.27% and an HV60™ of 22.14%. The HV180™ (which covers 180 trading days or ~9 months) is 33.20%. The stock is less volatile and clearly is using it's cash in ways outside of product development (exclusively). There is no more Steve Jobs, and so there is no more old AAPL. That's not good or bad... It just is.

[L]et's focus on the last earnings report, and then turn to the option market to complete the picture.

Earnings Results from July 2013
EPS: $7.47 vs. $7.31(est)
Revenue: $35.3B vs. 35B (est)
Gross Margin: 36.9% vs. 36.7% (est)
iPhone Sales: 31.2 million units vs. 26.5 million (est); BUT, average selling price down ~ $32.
iPad Sales: 14.6 million vs. 18 million (est)
New Product Release: ? Coming at end of year?

So those numbers don't really mean anything without some words behind them. First, AAPL's big story for along-time for AAPL was gross margins and they have finally broken below the 40% level (which some think is a 'magical' level). Some of that came from depressed iPhone sales prices even though the number of units sold was higher than expected. But.. it's not what you think. iPhone is losinig market share. Here's a snippet from an in article:

Apple's (AAPL) share of the global smartphone market shrank in the second quarter as major rivals like Samsung and LG shipped many more units than the iPhone maker.

Market research firm IDC late Thursday reported that worldwide smartphone shipments rose 52.3% over the year-earlier period to 237.9 million units. Apple, however, posted the slowest growth of the top five vendors at 20%. Apple's market share sank to 13.1% from 16.6% a year ago.

Apple remained the No. 2 vendor behind South Korea-based Samsung, which garnered 30.4% market share on unit shipment growth of 43.9%.

Apple smartphone market share at lowest level in 3 years , written by Patrick Seitz.

The Tablet market (iPad for AAPL) performed well below expectations. But that's not the big news either (IMHO). The biggest news seems to be that the company again (now for the second year) is saving their "big surprise" product news for the end of the year. Some analysts feel last year's move to do the same was a major mistake and may have cost the firm billions in sales. Well, whatever you think, they're doing it again.

None of this is catastrophic, it's just a reminder that AAPL isn't the same company it used to be.. And btw, at $420 billion in market cap, how could it be?

OK... Quite a ride... Now to today:

AAPL is down pretty big today and it's based on, well, another disappointing presentation by Tim Cook and team. Here's a snippet from The Motley Fool:

Yesterday's iPhone event was supposed to be Apple's moment to shine. It was one of CEO Tim Cook's perhaps final chances to prove that the consumer tech giant can recapture the glory it had when Steve Jobs was around.

Instead, we got more of the same.

•The iPhone 5s has some new features, but it has the same form factor as last year's iPhone 5. That wouldn't be a bad thing if Apple hadn't surrendered market share, going from 17% of the global market to just 13% over the past year.

•The iPhone 5c was supposed to be the entry-level device that would finally open doors for the company with the prepaid wireless carriers here, and the countless carriers abroad, which don't offer hundreds in subsidies in exchange for long-term contracts. No. It's unlocked price of $549 without a contract isn't going to make a difference in a world where entry-level Android smartphones are available for a sliver of that.

•After seeing Samsung -- the company that overtook Apple in smartphone sales -- introduce a smartwatch last week, there was always the hope that the Cupertino taste maker would finally make a big splash in wearable computing. No. It didn't happen.

There are plenty of snazzy features in the iPhone 5s. The camera is dramatically improved, and that's a big thing for many buyers trying to consolidate gadgetry. However, boasting about the more powerful 64-bit processor seems as if it's missing the mark. I've heard people complain about slow PCs, but never slow smartphones. It's a nice feature, but it's not a very marketable one if it's not aiming at an addressable problem.

Source: The Motley Fool via Yahoo! Finance: When Did Apple Lose Its Magic Touch?, written by Rick Munarriz.

I've included the updated two-year chart for AAPL. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

The really noteworthy point here today is that while AAPL shares are down, the implied volatility is down as well.  What does that mean?  It means that while the equity market is valuing AAPL lower today based on yesterday's events (by about $20 billion), the option market sees less risk in the firm.  In English, we're continuing to see a sort of equilibrium in AAPL, a settling of the realization that the firm is, yes I'll say it again, not the great innovator of the world anymore.  It's a really big, successful, cash rich technology company which is not leading the world, and is in fact starting to play catch up. They're re-packaging old (but very successful) ideas and that's great, but it's not new.  It's not innovative.  It's not... the old AAPL.

The disruptive mega-cap technology companies are AMZN, GOOG, FB (yeah, I said it) and maybe Samsung.  Whatever the list, AAPL isn't on it.

Now I'm not sure why people are so emotional about this firm -- I use AAPL products, I'm a movie maker and I use an iMac with Final Cut pro (and 10 other incredible applications bundled with it).  My fiance has an iPhone.  We've looked at Apple TV and an iPad.  I really like AAPL products.  But there's nothing remarkably new anymore.

Is China a huge new market?  Of course it is. Is a P/E (TTM) of 11.69 sort of low if China ends up being a windfall?  Yeah, very much so.  But who says China is a windfall more than is already priced into the stock?  Note the phrase "already priced into the stock."  If it is, then AAPL will rip higher (maybe a lot higher).  But what evidence do we have the firm will beat expectations in China? What evidence do we have that the firm will beat expectations anywhere?

We do have evidence of lower margins, shrinking market share across multiple product lines and even disappointing same product revenues for the iPad.

That's it.  That's what we have.  Beyond emotion, blue shirts and loyalty.

Will the "new" AAPL blow us away? Maybe (it is possible)...  I hope AAPL does re-innovate -- it helps competition and it helps consumers; they changed the world, no doubt about it. I hope they change the world again.  But if you had to bet, what odds would you need to take that side? Steve Jobs is gone.  That really does matter.

This Just Isn't the Company it Used to Be... And it Never Will Be Again.

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