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One unusually large put option purchase in Apple Inc (AAPL) stock shows that a large investor is bearish. But has AAPL stock really peaked? Maybe not, especially if its free cash flow (FCF) comes in strong.
The large put option purchase is at the top of Barchart's Unusual Stock Options Activity Report on Wednesday, June 21. The report indicates that an investor likely bought an in-the-money put option for a large amount of money for expiration on July 7. That indicates they believe the stock will likely fall in the next 16 days.
For example, the Barchart report shows that a large tranche of over 10,000 put options traded at the $195.00 strike price for expiration on July 7 at a price of $10.00 at the midpoint. That means that the put investor buying those options hopes to see the stock fall below $185.00 (i.e., $195 strike less $10 premium paid).
As it stands today, June 21, AAPL stock is at $184.10. So, so far, the trade seems to be making money for the investor. Keep in mind that they would have had to ante up at least $10 million for the trade (i.e., $10 x 100 shares x 10,000 options purchased).
This means that the investor expects AAPL stock to have peaked for the time being. But has it really reached its zenith, especially since quarterly earnings are coming out soon (i.e., in mid-July)? Maybe not, especially if its free cash flow (FCF) comes in strong with its quarterly earnings report.
Valuation and FCF
Recently on June 4, we wrote in Barchart that AAPL stock was slightly overvalued, “Apple Stock Rises Over Its Historical Value Metrics, Making Short Put Trades Attractive.” At the time AAPL stock was at $180.95, and we argued that it was trading at 28x earnings whereas its historical 5-year average multiple was lower at 23x to 24x.
But this does not necessarily mean that AAPL stock will fall significantly from here. For one, the company can grow into its multiple over time - as earnings per share rises and the stock stays level.
But in addition, if analysts forecast that the company's FCF will continue to rise, they could be willing to put a higher multiple on the stock. For example, last quarter Apple generated over $25.6 billion in free cash flow (i.e. $28.64 billion in operating cash flow less $2.92 billion in capex spending). That was on par with the $25.65 billion in FCF it made a year earlier.
But in the June quarter of last year, Apple generated just $20.378 billion in FCF, based on figures from Seeking Alpha. Therefore, if Apple can keep the momentum in FCF it made last quarter and generate $25 billion+ in FCF this quarter, that will be a significant gain over last year's $20.4 billion FCF generation.
Target Price for AAPL Stock
As a result, AAPL stock could keep moving higher as analysts rerate the stock. For example, right now with Apple's $2,910 market capitalization, the stock trades on a forward FCF multiple of 28.4x. This is based on an assumption that Apple generates $102.4 billion in FCF, i.e., $25.6b quarterly x 4.
Therefore, assuming AAPL stock gets treated to 30x FCF, its valuation would be over 3 trillion at $3,072 billion (i.e., 30x $102.4 billion). That implies that AAPL stock could rise at least 5.56% from here over its existing $2910 billion market cap today.
But don't forget that the company is massively buying back its shares. That could add another 1 to 2% to its price target. Bottom line, over the next month we could actually see the stock rise 7.5% from here to $197 to $200 per share.
So, the bottom line here is that, despite this investor's large put purchase, which could work out in the near term by the time the July 7 expiration ends, over the next month, AAPL could move higher. It may not have peaked if the company reports substantial FCF as it did last month.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
