Apple Traders Bet Stock Will Soar To New Record

(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of AAPL.)

Apple Inc.'s (AAPL) shares have pulled back this month after soaring about 30% to a record high. Don’t expect that decline to last. Apple options traders are betting the shares will rise at least 6% - and by as much as 14% - to a new record high by early next year. 

The positive sentiment comes as analysts are raising their earnings and revenue estimates for fiscal 2019 after the company launched its newest line of iPhones. (See: Demand for Apple's Priciest iPhone Is Better Than Expected: Kuo.)

AAPL PE Ratio (Forward 1y) data by YCharts

Increasing Estimates

Analysts have raised earnings estimates for fiscal 2019 by almost 4% to $13.64 per share since the end of July. Meanwhile, revenue estimates have increased by almost 3% to $279.5 billion. Analysts now see earnings growing by more than 16% in fiscal 2019 as revenue rises by more than 6%. Estimates for 2020 are also rising. (See: Apple's New iPhones Will Boost Market Share: Canaccord.)

Analysts have also increased their average price target on the stock by over 15%, to an average price target of $231. 

AAPL EPS Estimates for Next Fiscal Year data by YCharts

Bullish Options Bets

Traders owning options set to expire on January 18 are bullish. The number of open call contracts, a bullish sign, outweigh by a ratio of 2 to 1 the volume of bearish put contracts at the $220 strike price. There are about 16,000 open calls, which have a value of about $19.2 million, a big wager. The options imply the stock will rise by 6% to about $232.

Some options traders are betting the shares will rise even higher to about $252, using the $250 strike price for January. That strike price has almost 46,000 open contracts, and are worth about $10.5 million. This is the largest open interest position for all of the Apple options. 

Too Cheap

AAPL PE Ratio (Forward 1y) data by YCharts

Given the raised estimates and the brighter growth outlook for Apple, the stock may look inexpensive to some investors. The stock trades at a 2019 PE ratio of about 16.1. When adjusting the earnings multiple for earnings growth, shares are trading with a PEG ratio with 1. These numbers suggest that Apple's stock has continued potential for gains - as long as Apple's actual quarterly results match investors' higher expectations.

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.