AAPL Stock: Apple Inc. Earnings Could Send Shares Soaring

AAPL StockAAPL Stock Earnings: Bullish or Bearish?

Apple Inc. (NASDAQ:AAPL) is expected to report its third-quarter earnings on July 26, 2016 after market close. Shares of AAPL stock are down five percent year-to-date, underperforming its benchmark index, the NASDAQ. Shares have been trading within a confined price range, creating a descending triangle (see chart below).

Apple Inc. NASDAQ Chart

Chart courtesy of www.StockCharts.com

The pattern is one of consolidation and its outcome will determine the future direction of AAPL stock. Most triangle patterns have five points of contact before the pattern either breaks upward or downward. AAPL stock has completed these five points of contact and is on the verge of breaking out of the pattern.

The question that remains is this: in which direction will the pattern play out and will earnings be the catalyst?

If we break down the company’s previous earnings reports, we can see management’s track record regarding earnings estimates and guidance. A solid track record would give investors confidence going into earnings, while a shoddy track record would leave investors anxious.

The good news is that Apple has a great record of beating on the bottom line. Over the last 23 quarters, Apple has beaten estimates 18 times. The bad news is that Apple has missed on the top line the last two quarters. This bad news is compounded with lower earnings guidance for the last three quarters, including the current reporting quarter.

The current trend leaves me feeling anxious. Even though AAPL stock has a great track record of beating on the bottom line, the top line leaves much to be skeptical about. So, regardless of the earnings number, if Apple doesn’t beat on the top line (revenue), AAPL stock may endure substantial selling pressure.

The following chart illustrates the reaction of AAPL stock post-earnings:

Apple Inc. NASDAQ INDX

Chart courtesy of www.StockCharts.com

  1. October 27, 2015: Apple reported earnings of $1.96, beating consensus estimates by $0.08. The company posted a slight beat on revenue and reaffirmed forward guidance. Post-earnings, AAPL stock gapped up and closed the day up 4.1%.
  2. January 26, 2016: Apple reported earnings of $3.28, beating consensus estimates by $0.05. However, the company missed estimates on revenue and lowered forward guidance. Post-earnings, AAPL stock gapped down and closed the day down 6.6%.
  3. April 26, 2016: Apple reported earnings of $1.90, missing consensus estimates by $0.10. It missed estimates on revenue and lowered its forward guidance. Post-earnings, AAPL stock gapped down and closed the day 6.3% lower.

If history is indeed a window into the future, the current post-earnings volatility will not be enough to move shares out of the stock’s current range. AAPL shares are currently trading at $98.60 apiece.

Options implied only projects a move of 5.5% up or down, and previous earnings reactions have ranged as high as 6.6%. Even if we use a seven percent range, shares would close the day at either $91.70 or $105.50. These levels fall right on Apple stock’s support and resistance levels. Perhaps the momentum from the report will be enough.

The Bottom Line on AAPL Stock

Apple has a long record of beating on the bottom line and I expect this to continue. My concerns lie in the company’s revenue and forward guidance. The trend going into earnings has been disappointing. The descending wedge has confined Apple stock’s share price for a year; it has now hit five points of contact and is ready to break.

At this time, I am sitting on the sidelines, awaiting a breakout in AAPL stock that could happen just days after earnings if the report generates some solid momentum.