(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
The options market is betting Apple Inc. (AAPL)'s shares rise 17.5% by June of 2018, a much more bullish outlook than some analysts who have opined that shares of Apple could have rallied too far over the past several weeks. The options set for expiration on June 15, 2018, are anything but bearish, implying shares could rise to nearly $205, an increase from its current price around $174.5. That would also push Apple's total value past $1 trillion by mid-2018, much earlier than some analysts expect. (For more, see also: Why Apple Faces Trouble Ahead.)
Apple has had a historic year with a stock price that has risen by over 50%, creating almost $290 billion in market value raising the market cap from $609 billion to $896 billion. Despite that rise, Apple is trading at approximately 15.2 times forward earnings estimates, and nearly 3.2 times one-year forward sales estimates. Perhaps valuation is part of the reason why some traders have laid out roughly $12.7 million in bets on the $200 calls, for expiration in June, based on the open interest.
The valuation for Apple is undoubtedly compelling based on the expected earnings growth rate of 24% in fiscal 2018 to $11.43, while revenue is expected to grow by 20% to almost $275, according to Ycharts. It makes it hard to argue shares of Apple are anywhere close to overvalued. Should the stock price rise to $204 like the options are suggesting, the stock would be trading at roughly 17.8 times forward earnings estimates, which is still less than the S&P 500 current forward earnings multiple of 19. (For more, see also: What Makes Apple So Valuable.)
Bullish Bets Being Placed
The long straddle options strategy for expiration on June 15, using the $175 strike price, is suggesting shares could rise or fall by nearly 15%, a trading range of $150 to $200. But the calls are currently favored by almost 5 to 1 versus the puts, with nearly 11,000 contracts of open interest, suggesting traders are betting more heavily on shares of Apple rising.
A Rise to $204
The $200 strike price has the most significant open interest, with over 31,000 contracts, with a cost of about $4, a notional value of nearly $12.7 million. It implies that shares of Apple would need to rise to over $204 for the options to break even. The $125 strike price puts have the most significant open interest with roughly 18,000 contracts, trading at a price of $0.80, for a value of approximately $1.5 million.
Rising too far too fast doesn't always mean that that stock needs to fall if the valuation suggests shares aren't expensive. In this case, the options traders are betting shares of Apple continue to rise, and bringing Apple's valuation to over $1 trillion.
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.