(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) stock has soared in 2018 rising by more than 33%. Now some options traders are betting the stock increases as much as 14% more, by the start of next year.
With the company expected to unveil its new iPhone and iPad on Sept. 12, some investors may be betting the newest iPhone cycle will be a strong one. According to reports, Apple suppliers are preparing to have their strongest fourth quarter ever. Some expect 70 to 75 million iPhone shipments by year-end. (See also: Apple Suppliers Poised for Highest Shipments Ever.)
The options due to expire on Jan. 18 at the $225 strike price are very bullish. The calls at that strike price outweigh the number of puts by more than 10 to 1, with 17,200 open call contracts. For the buyer of the calls to break even, the stock would need to rise to $237.5—an increase of almost 6% from its current price around $225. It is not a small wager either with the value of the open calls at almost $22 million.
Some traders are even more bullish and see shares rising as much as 14%. The calls at the $250 strike price have seen increasing levels of open interest since the middle of July, with the number of open calls climbing to 31,000 open contracts. The stock would need to rise to $254 for the buyer of the calls to break even if holding them until expiration. The dollar value of those open calls is about $13 million, a large wager given the length of time until expiration
The bullish sentiment for the options traders reflects analysts’ estimates, which continue to rise. Earnings are forecast to grow by 27% in 2018 to $11.72 per share up from a prior forecast of $11.47 at the end of July. Earnings for 2019 are forecast to increase by 15% to $13.52 per share. Meanwhile, 2020 earnings are forecast to increase by 11% to $14.97 per share. That is up from prior estimates of $13.16 and $14.49 per share.
AAPL Annual EPS Estimates data by YCharts
The rising estimates have helped to keep Apple's valuation at reasonable levels, trading at 16.6 times 2019 earnings estimates. Even when adjusting that valuation for growth, the stock trades with a PEG ratio slightly over 1.
AAPL P/E Ratio (Forward 1y) data by YCharts
Should the new iPhone cycle prove to be as powerful as some of the suppliers are expected, earnings and revenue estimates may continue to rise. That means the stock is likely to follow, giving the options traders a potentially lucrative payoff.
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.