The recent analysis on Apple (NASDAQ:AAPL) at Seeking Alpha concluded with a momentum thesis, not a mean-reversion thesis. At the time of publication, I was recommending my subscribers follow me in shorting the stock. Let this article be my counter-point, my reasoning for shorting AAPL again.
Last time I shorted AAPL was right before the peak of the pre-corona market. Some could say I was lucky with my timing and that my new short lacks the novel catalyst of a pending pandemic. Fair enough, but consider my reasons for a pending Apple pullback before dismissing me.
Apple Is at War
My previous AAPL short relied partly on misinformation about the severity of SARS-CoV-19 (termed 2019-nCoV at the time of writing) and its effects on the Apple supply chain. Through my many analyses on Apple investor patterns, I have found that Apple investors are overly optimistic regarding bad news. That is, they tend to discount the downside of the potential negative catalysts, only dropping the stock once the situation is clearly not turning in their desired direction.
While we do not currently have the previous atmosphere of “it’s just a flu” with regard to COVID-19, we do have a similar atmosphere with regard to the developer dissent in the App Store. From Facebook (NASDAQ:FB) to Epic Games, developers are feeling mistreated by Apple, citing unfair treatment and (allegedly) excessively large transaction fees. Apple, of course, claims that the 30% transaction fee is both fair and nothing new – the rate has been stable since the beginning of the App Store.
If you are confused as to why so many companies are suddenly complaining about a long-held standard, look no farther than Apple’s recent business transaction shift: from products to services. While Apple previously acted as a platform on which businesses could launch and distribute services, it is now directly competing with many of its customers. The company is bundling together subscriptions that can effectively push its App Store clients to lower revenues, all while still taking that sweet 30%.
Clear Bias in Apple
Put simply, Apple is competing with its competitors while holding ownership of the platform. That is, should Apple Service A and external Service B be in direct competition through the App Store, price the services equally, and be equally popular, Apple still comes out on top by collecting 100% of service A’s revenue and gobbling up 30% of Service B’s revenue; this does not describe a fair competitive environment.
Developers are understandably upset. Like SARS-CoV-19 in February, this is an issue that is not going away but growing in size. The more upset developers standing across from Apple, the more power they have to effectively boycott or change the App Store policies. Apple needs a vaccine.
No Winning Strategy
Unfortunately, with 30% of Apple’s revenue stemming from App Store distribution, nearly any change that appeases developers will put a dent in Apple’s revenue. The best-case scenario is Apple reducing its 30% transaction fee. Worse situations include drawn-out legal battles that end in a change in the business model and a full-on boycott of the App Store, driving developers (and thereby customers) to other distribution platforms. In any scenario, Apple sees reduced financial numbers. Reduced profits and revenue will be reflected in earnings reports and drag down the stock – a stock that is trading at an all-time high, overbought, and dot-com level valuations. This is not a time to dismiss the potential that Apple’s stock will fall.
As earnings drive stock prices, this issue could mark a temporary peak for Apple’s stock price. The timing is in line with Apple’s seasonal pattern – and the market’s general seasonal pattern – of pulling back in September. I must remind readers that I am not an Apple bear, but do write warnings about this stock when I believe pullbacks are looming, as you can see from my numerous articles on Apple in the past.
From a historical perspective, Apple’s worst month (read: most likely to underperform) is September:
(Source: Damon Verial; data from Tiingo)
I thus am issuing such a warning. Now is not the time to be elated in spite of AAPL hitting new highs. Apple’s war with its App Store developers will not end with Apple as a winner – at least in the short term.
I encourage you follow me in shorting this stock. Here are the play and technical aspects supporting the play I recommended on Monday. On Wednesday, the time of writing, I believe the following option strategy is still valid.
How to Trade It
Money flow is getting weaker in AAPL, and generally this is when you want to open short positions. The typical pullback would put us in the range of $110 to $115. The key is passing below the support level at $125.
We also have an open gap at around $118. This looks to me like an area gap. Our pullback target meshes with the idea that this is an area gap, allowing the gap to fill over our holding period.
Of course, a lot of this technical stuff is just to support the seasonal play. My goal is just to hold over September, which is when I expect the pullback to occur. It’s a simple seasonal trade with a month-long holding period.
I want to sell calls. But you can go with long puts, too. I just feel that the puts are a bit expensive right now (most puts on tech stocks are right now).
Sell Sept. 18 $132.50 calls.
Buy Jan. 15 $130 puts.
Selling calls has unlimited upside risk, while buying the puts limits you to risking only the debit on the put options. Go with whichever is more suitable for your risk tolerance.
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Disclosure: I am/we are short AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.