Apple Needs “Big Mama” Beat to Keep the Markets Rolling *

Apple reports after the bell on Monday and we think this event will determine the direction of the risk markets over the next few weeks.  Given its recent and historic run-up into earnings, the company will have to beat estimates by a very large margin for momentum in the stock and in the overall market to continue, in our opinion. 

New Economy Leader
Not only is Apple 20% of the NASDAQ, it is the leader and symbol of the New Global Economy.   Consumers all over the world seem willing to do whatever it takes to own Apple products.  The transformative potential and innovation of Apple may be Obama’s Black Swan as the Internet was for the Clinton Administration.  Imagine a medical diagnostics app for the IPad that someday replaces routine visits to the doctor office.  We have no doubt this is where we’re headed.

Apple is THE Market Leader
Apple’s stock has exhibited strong leadership since the March’09 bottom.   After constructing Chart 2, we were amazed to see how Apple and S&P500 have generally decoupled during broad market sell-offs and recouple during market rallies.  Rarely does correlation track the performance of a price series so well.  This is confirmation of Apple’s strong  leadership and relative strength.

Historic Run-up into Earnings
Similar to the overall market, the stock is very hot going into earnings and will need a big beat for the momentum to continue.   Apple is up 9 days in a row, which has happened only three times in the past ten years, and has rallied more than 11 percent in the past 10 days.  Chart 4 shows the post release next day return on Apple given its 10-day return prior to an earnings announcement.  The data covers 15 releases from Jan 2007- Jul 2010.

Excluding the noisy data points during the market crash,  there is a clear negative correlation of how the stock reacts to earnings and its run-up prior to the release.  Note there are only two points where Apple was up 11-12 percent into earnings – January 2007 when it sold off 6 percent after a 46.15% beat, and July 2009 when it traded up .76%. after beating estimates by 15.38%.

Seasonality
Chart 3 is interesting as it illustrates the relationship of the stock’s reaction to the earnings beat.  Not surprising, there is clear strong relationship to how the stock reacts to earnings beats.  The outliers reflect seasonality as three of the four data points with negative returns are associated with a January earnings release. 

Needs 30% Beat
Based on history and given the recent run-up of the stock,  Apple is going to have blow away the estimates and probably needs to hit a number of $5.20 or above to keep the momentum going.  We wouldn’t be surprised, but are not willing to make a big bet on it, or against it, for that matter.  We have no doubt IPad sales will blow away estimates, but we’re focused on margins.  It will be interesting to hear what management has to say about labor and materials costs on the conference call as we know their suppliers have been dealing with these issues.  In addition, during the July conference call,  management stated the IPhone4 has a higher cost structure.  

Our baseline scenario is the good news is sold, which causes a small correction in the overall market and some consolidation in risk assets.

Apple, in our opinion,  is representative of the overall market,  which has run-up in anticipation of QE2.   We love Todd Harrison’s observation,

The net takeaway is more of the same: the specter and promise of QE2. I’ll say this, given the widespread global anticipation of this program, this Wizard of Oz better be a Big Mama when the curtain is finally flung to the side. A chunk of this perceived stimuli is already baked into the tape. The question is whether the “sell the news” crowd will openly ask “what’s next?” once it’s unveiled.

We’ll have more Apple analysis on Monday. Stay tuned!

* Revised based on consistent earning series, which includes Q1 2010 accounting changes.

This entry was posted in Equities and tagged , , , . Bookmark the permalink.

12 Responses to Apple Needs “Big Mama” Beat to Keep the Markets Rolling *

  1. Pingback: Apple Sliced 6% in After Hours Trading on 14% Earnings Beat | Global Macro Monitor

  2. Pingback: iPad2 expects monthly sales of 6M vs current 4M per quarter | Global Macro Monitor

  3. Pingback: Godspeed, Steve Jobs…. | Daringminds.com

  4. Pingback: Godspeed, Steve Jobs…. / Brainyloft Press SOHO / Feed Your Brain

  5. Pingback: Apple’s Big Beat: What’s Next for the Stock? | Brian Brown's Official Website

  6. Pingback: Apple’s Big Beat: What’s Next for the Stock? | The Big Picture

  7. Pingback: Apple’s Big Beat: What’s Next for the Stock? | The Garden of Princess Aileen 心灵的驿站

  8. Whether or not you’re trying to make the best beat ever, it’s important to know that your beat maker software can take your
    music where you need to go. Being able to work with other artists and
    turn an idea into music is a great skill.

  9. Pingback: cigarettes sale - buy online smokes

  10. Hi there Twitter performs fine for my situation but your web site is loading
    steadily which went on nearly a minute to successfully load, I am
    not sure whether or not it’s my personal problem or maybe web site issue.
    On the other hand thanks for creating marvelous article.
    Everybody who actually discovered this great site really should have discovered this article incredibly helpful.

    I hope I’ll be able to get even more awesome stuff and I also should really
    flatter simply by stating you have carried out fabulous job.
    I already have your site book marked to check out blogs you post.

  11. Hey there Your site runs up honestly slow for my situation, I don’t know who’s issue is that although twitter and facebook starts extremely
    quick. Anyways, I am going to thank you for placing amazing content.
    Perhaps this has become beneficial to many people who arrived
    on this page. I really hope I will be able to get even more incredible information and I should certainly complement your site by telling you
    have carried out wonderful writing. Soon after checking out your article, I’ve bookmarked
    your web site.

  12. Chanel says:

    Hey Your entire web site runs up seriously slow to me, I not really know who’s issue is that but
    wikipedia starts pretty good. Anyways, Thank you for publishing
    such type of beautiful blog post. I’m assuming it really has been beneficial to
    lots of people who came at this point. I really hope I will be able to find
    even more remarkable stuff and I also should really
    compliment your site by saying you’ve done remarkable job.
    To get more understanding through posts that you post,
    I have saved to my bookmarks this web site.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s