Was Strangling Apple a Good Idea?

Apple (AAPL) beat analyst estimates by not one or two cents, but by a full twenty cents when it reported earnings that grew 73% yesterday evening. The company reported earnings of $818 million on revenue of $5.41 billion, which grew 24% when compared to the same quarter last year. While iPod sales grew 21%, the number that caught everyone's eye was the 33% growth in Macintosh computers. There has been a lot of speculation in the past that iPod sales would eventually help Apple improve sales of its computers but it is ironic that this is happening at a time when the company has dropped "computer" from its name and is now known just as "Apple Inc" instead of "Apple Computer".

Apple sold 270,000 of its new iPhone device in the last two days of June, which happens to be a much higher number than the 146,000 activations reported by AT&T (T) yesterday. This may have to do with the fact that activations of iPhones are not done at an AT&T store but from an iTunes account at home. The iPhone that I bought as a gift last week was not activated until a day later. If investors are not impressed by the sale of over quarter million iPhones in just two days, I have no idea what would impress them. Apple plans to sell about 1 million iPhones in this quarter and about 10 million in 2008. It would be interesting to see if Apple can achieve this number given the price of the phone, the two year contract required and the exclusive deal with AT&T.

After jumping all over the map, the stock closed up $12.92 or 9.4% to $150.18 in after hours trading. If the stock posts a similar jump in the regular trading session on July 26th, the trade I mentioned in my article Using Options To 'Strangle' Apple, Research in Motion would be very profitable. The call options should more than double in value while the puts would drop a lot but still retain some time value as expiration is more than three weeks away. I have seen stocks react to an event in a certain way during after hours trading and in a totally different manner in the following regular trading session.

Based on the reaction today, I will post an update to this blog post about my plan of action. Since the market has generally been weak, I will most likely sell the calls and the puts to complete the trade. Another alternative would be to sell an equal number of puts and calls (3 of each from the model portfolio), while retaining the extra call in hopes of further gains over the next three weeks.

Comments

[Tom B:]

This is why I am a LONG term investor in AAPL. The iPhone is great. IPods are great. But the key driver for me is the high probability that Apple will probably have >20 % of the global computer market in 2-4 years, with OS X looking so good, and MSFT looking SO incompetent with Vista and the Xbox and etc. I knew Apple's day would come when Steve Jobs came back.

2007 Jul 26 09:52 AM

[charger01:]

I think Apple is Right On! I think the iPhones are running Leapord OSX, and that Apple will be able to brag about it, when they release Leopard later this year. Why else would they have pulled all the Leapord Software engineers off of the Leapord Testing, so they could fix the iPhone bug, back in early June, so they could meet their deadline, which they did! Won't that be a hoot!!

2007 Jul 27 04:46 PM

[Neil Anderson:]

Apple is certainly firing on all cores these days. And multi-core it is!

2007 Jul 26 03:18 PM

[Asif Suria:]

Interesting website Neil. I am assuming you are back from all your adventures now.

2007 Jul 26 04:44 PM