• Apple pre-announces a rare revenue shortfall.
• CEO Tim cook provides a powerful and informative interview for investors.
• Long term trading patterns reflect a full recovery

On January 2, 2019 Apple issued an earnings pre-announcement titled “Letter from Tim  Cook to Apple investors” and it’s important that anyone investing in, or trading, Apple shares take the time to read the letter.

Why do Companies Pre-announce Earnings?

Companies are governed by the Securities and Exchange Commission (SEC).be

If a company has information which is important to the decision-making process of investors then they are required to disclose the information. To not disclose the information can be considered fraudulent and the company can be subject to litigation, which is actually quite common. An example would be civil litigation against Align Technologies for not disclosing the nature or extent of its discounting strategy in 2018.

The Pre-announcement

Apple reported the following changes

• Revenue of approximately $84 billion (This was below the Q4 2018 guidance of $89B-$93B)
• Gross margin of approximately 38 percent (This was below guidance of 38.5%)
• Operating expenses of approximately $8.7 billion
• Other income/(expense) of approximately $550 million
• Tax rate of approximately 16.5 percent before discrete items
• We expect the number of shares used in computing diluted EPS to be approximately 4.77 billion.
• Based on these estimates, our revenue will be lower than our original guidance for the quarter, with other items remaining broadly in line with our guidance. 

Tim Cook cited the following reasons for the revenue shortfall

• First, we knew the different timing of our iPhone launches would affect our year-over-year compares.
• Second, we knew the strong US dollar would create foreign exchange headwinds
• Third, we knew we had an unprecedented number of new products to ramp during the quarter and predicted that supply constraints would gate our sales of certain products during Q1
• Fourth, we expected economic weakness in some emerging markets.

Cook further stated

“most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.”

“Our profitability and cash flow generation are strong, and we expect to exit the quarter with approximately $130 billion in net cash. As we have stated before, we plan to become net-cash neutral over time.”

“As we exit a challenging quarter, we are as confident as ever in the fundamental strength of our business.”

“Most importantly, we are confident and excited about our pipeline of future products and services. Apple innovates like no other company on earth, and we are not taking our foot off the gas.”

“We can’t change macroeconomic conditions, but we are undertaking and accelerating other initiatives to improve our results.”

Every investor should watch the following full 22 minute interview with Apple CEO Tim Cook.

Take note of how he addresses the following concerns which have been the focal point the recent stock price pullback.

• Soft product boycott by Chinese consumers
• Trade war deal progress
• Negative analyst commentary

Also notice the body language and response of Cook when Cramer asks about the iPhoneXR and Cook and replies ‘of course I would like to sell more iPhones’. This reflects a certain level of disappointment even though he had expressed that the XR had been the best selling iPhone every day since launch.

Apple CEO Tim Cook talks China, Wall Street negativity and innovation with CNBC’s Jim Cramer from CNBC.

In the following video, note Cramer’s comment that Tim Cook receives information on the trade negotiations ‘on a real time basis’. That is a powerful position and gives credibility to Cooks optimism on a trade deal.

Jim Cramer: Tim Cook more bullish than I am on US China resolution from CNBC.

TECHNICAL ANALYSIS

LONG TERM (2008 -Present) 

The Pattern

Apple’s stock price pulls back consistently 

• Every 2.5 to 3 years
• In Sept to October of a pullback year
• Recovers fully to the previous peak within 10 months to 1.5 years.
• Touching the red line ‘ 200-week moving average’ marks the bottom in every pullback.

MACD Momentum  – the extreme velocity of downside momentum exceeds all other pullbacks including the global financial collapse of 2008/2009.

Money Flow Index – 20 is ‘Oversold’, 80 is ‘Overbought’. at a reading of ‘6’ the stock is at an extreme ‘Oversold’ condition, lower than any other pullback.

The BEAR argument says that the stock price could decline as low as $120.

SHORT TERM

Every rise has been followed by a pullback.

Short term downside risk is to $142. Upside reward to $160, then very little resistance to $180.

Need to see the following

• On Balance Volume – break the downtrend line and rising indicating share accumulation by financial institutions.
• Stock Price – break in the downtrend line followed by a slight pullback to a ‘Higher Low’ reflecting buying interest.
• Volume – decreasing volume would reflect the High Frequency Trading (HFT) machines have started to leave Apple.
• MACD Momentum – must begin to rise

When these four items coincide, a reversal will be confirmed.

On a recovery, there will be very little resistance and the stock price could rise very rapidly.

Why did the stock price pullback?

The most important consideration during any pullback is to analyze the cause of the pullback to identify if the pullback is an opportunity to buy or a warning to sell.

There have been a number of threats to Apple which have been highlighted previously, these are not new.

• Soft Boycott by Chinese Consumers during trade wars.
• Potential tariffs, increasing costs which must be absorbed by the company or passed on to consumers.
• Emerging Markets macroeconomic uncertainty – every investment thesis must be supported by a strong macroeconomic environment.
• Discontinuing the reporting of iPhone units sold.
• Lowered Revenue guidance at the Q4 Earnings Report.

What does that mean at MONEYWISEHQ

$400B has been taken out of Apple by Financial Institutions and we need to see that money start to flow back into the company to confirm any price reversal.

Apple reported a revenue shortfall from $89B-$93B down to $84B, a 6% drop yet the stock has declined by nearly 40%.

There are two sides to consider.

The BULL – The pre-announcement provides certainty to financial analysts. they are able to put the numbers into their price estimate models and more accurately value Apple based on facts rather than speculation of a worst case scenario. The price decline is an over reaction and has reached extreme levels beyond the 2008 financial crisis. The trade war will find a resolution. a reversal will find little resistance to the upside.

The BEAR – The pre-announcement brings to question management credibility in forecasting the previously announced financial guidance in October. Apple best days are behind it and there will be little to no growth going forward in a saturated phone market.

Long term, Apples share price will recover. there are a number of catalysts including

• Trade War resolution
• Allowing apple streaming TV on Samsung device
• Apple Streaming TV service to a 1.2B device installed base beginning early 2019

Bottom Line… That was a powerful interview with the worlds most powerful and influential CEO. The share price pullback (40%) far exceeds the revenue shortfall (6%). The long term pattern reflects every pullback recovers within 10-18 months.