Apple's Stock Faces Steeper Losses

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This story was originally written for subscribers of Reading The Markets, an SA Marketplace service, on June 14. It was updated on June 15 where italicized.

Apple (NASDAQ:AAPL) shares have plunged along with the broader market. The good news is that the stock’s PE ratio has fallen dramatically. The bad news is that the PE ratio is still at the upper end of its historical range, suggesting the shares are not cheap.

AAPL’s Valuation Will Probably Drop More

The question, of course, is what is the correct PE ratio for Apple and where the stock may ultimately settle out? That may still be lower than its PE ratio of 20.2 times fiscal 2023 earnings estimates. Earnings are expected to grow by 9% in fiscal 2022 and 7% in fiscal 2023. However, analysts are more optimistic beyond next year, with a long-term growth rate of around 11%.

Currently, the stock has a PEG ratio for fiscal 2023 of 1.83, which aligns with the stock’s pre-pandemic peaks. But that data suggests a PEG ratio of 1 to 1.5 may be more appropriate given the shifting economic environment. If analyst estimates are correct and earnings grow by that long-term growth rate of 11%, a 2023 PE ratio of between 11 and 17.6 may be where the stock is heading. Using a PE ratio of around 17 times 2023 and earnings estimates of $6.53, the shares would have a value of approximately $111.

Bloomberg

Betting on $105

With the market in a period of PE compression due to rising rates, it seems highly probable that Apple’s PE ratio should also continue to drop. That negative outlook could be prompting someone to make a big bet that Apple’s shares will plunge between now and options expiration on August 19. The open interest on June 14 for the $105 puts rose by 21,738 contracts. The data shows the puts were traded on the ASK and bought for $1.96 per contract. That implies that Apple’s stock drops to around $103.04 if the puts are held until that expiration date. It is a massive wager, too, with nearly $4.3 million paid in premiums to create the bearish position.

Separately, a bet was placed that Apple’s stock would remain below $145. The open interest on June 14 for the July 15 calls rose by around 14,000 contracts. Of that increase in open interest, the data shows 10,200 contracts were sold on the bid for $2.10 per contract. That means the trader took in a premium of $2.1 million.

Additionally, on June 15, the open interest for the July 15 $135 calls and puts rose by around 14,400 and 11,950 contracts, respectively. The data shows the calls were sold on the BID for about $5 per contract, while the put contracts traded on the ASK and were bought for around $7.25 per contract. Overall, this is a bet that Apple’s stock will be trading below $135 by the middle of July.

All of these options trades may be acting as hedges against long positions. In the case of the puts and the spread transaction, it could be the owner of the stock is buying downside protection. Meanwhile, the call trade could be a covered call strategy, where the stock owner is looking to generate additional income with the expectation that the stock won’t rise beyond the strike price.

What matters more, in this case, is the message that two separate traders do not see a material increase in Apple’s price and are expecting the stock price to fall.

Technical Trends Suggest the $120s

Another question is whether the stock makes it below $105, but the technical chart suggests that Apple can fall to around $120 in the coming weeks. The stock recently fell below a critical level of technical support at about $137. But now that support level is broken, the next significant region of support for Apple doesn’t come until the shares hit $123.

Additionally, the relative strength index for Apple is still around 37, which indicates the stock is not yet oversold. The RSI has also been steadily trending lower over the past several months, indicating that momentum is very bearish.

If the stock were to fall below $123, then the odds of the stock declining to around $100 would increase. Meanwhile, if the stock moves above $137, it could rise to resistance around $152.

Trading View

Overall, the market trends will be the overriding factor for Apple over the short term. More importantly, the direction of yields will be the deciding factor. As interest rates continue to rise, PE ratios and multiples, in general, will continue to drop, pushing Apple and the entire market lower.