Apple’s Stock May Still Have Much Further To Fall

Michael Kramer and the clients of Mott Capital own AAPL

Apple Inc.’s (AAPL) stock has had a tremendous 2020 with the shares up more than 50%. The significant gains come despite the stock falling more than 20% from its peak and with the S&P 500 up less than 3%. Still, some traders are betting that the stock doesn't even rebound, staying below $115 through the middle of October.

An analysis of the technical chart also suggests that the stock falls as much as 12% over the coming weeks. The bearish sentiment comes despite what's expected to be an iPhone supercycle with the release of its new 5G handset this fall.

Put Activity

On September 15, the October 16 $115 puts and calls rose by about 30,000 contracts apiece. The data shows the calls were sold for about $6.30, and the puts were bought for roughly $5.80. Overall, it creates a bearish spread transaction. It is a bet that Apple is below $115 by the time the expiration date rolls around in the middle of October.

Another example of a bearish bet was placed on September 18. That was when the October 16 $105 puts were bought for roughly $4.75. For the trader to make a profit on this bet, the trader would need the stock to fall to around $100 by the expiration date.

Technicals Breaking

Technically, the stock struggles, with the shares falling sharply from their peak, and trying to find some support in the $105 to $108 region. However, should the stock fall below its recent low around $104, it is likely to trigger a steeper sell-off to approximately $96. A drop of about 11.5% from its current price of $108.25 on September 23, allowing it to fill a technical gap created at the end of July after the company reported results and announced a stock split.

Additionally, we've been seeing bearish momentum enter the equity with a relative strength index that has been trending lower. However, the relative strength index would need to decline to 30 before indicating that it is oversold. It is currently only in the mid-40s. Suggesting the stock would need to fall even further.

Needs To Reset

The bearishness comes ahead of what is expected to be a meaningful upgrade cycle for Apple. With the launch of its new 5G iPhone. However, the market may have already priced in a lot of this excitement. The PE ratio on the stock has risen to historically high levels around 30; the last time the equity had a PE ratio, this high was around 2010.

The reason for the high multiple is that analysts are projecting earnings to advance by nearly 20% in 2021, while revenue climbs by almost 13%. However, the problem is that earnings and revenue growth are estimated to decelerate in 2022, with earnings growth slipping to just 9% and revenue growth falling to 5%.

If the market is now beginning to anticipate slower earnings and revenue growth for the company in the future. Then it is likely that the earnings multiple contracts further. Should that happen, the stock is likely to continue to drop. It is probably what is now being reflected in the options market and the technical charts. It's not to say that Apple doesn't have a healthy future; it's just that the stock may have gotten ahead of itself over the short term.

Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.

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