Michael Burry is Shorting Apple - Here is How You Can and Should Do So Too
Michael Burry, head of Scion Asset Management, just reported a huge short position in a large put option position in Apple (AAPL) stock. This article will go through some of the reasons why he might be expecting AAPL stock to fall and also how you can follow him in this trade.
On May 16, Scion Asset Management reported in a quarterly 13F filing that its put option holding is its largest position. The puts represent over 17.86% of total assets reported in the 13F filing. Assuming the firm is long those puts, the only way it is profitable is if AAPL stock falls a great deal over a relatively short period of time
This is a massive short bet on the stock. Michael Burry is famous for being one of the main characters in the book and movie, The Big Short. So when he takes a large position like this, many people take a closer look at the stock.
The problem is we don’t know for sure when the big purchase of puts was made. We also don’t know the strike price (exercise price), and how much he paid for the options. However, all options involve paying a premium, so the stock has to fall below the strike price by the amount of premium paid in order for the position to be profitable.
First, let's review why it might make sense to buy puts in AAPL stock, and then review what AAPL stock might be worth. Then we can look at some put trades.
Possible Short Themes Against AAPL Stock
The Unrivaled Investing YouTube channel suggests there are three potential reasons why Burry might be short AAPL stock.
The first is that the valuation of Apple stock has risen fairly high. It's now at a 24x forward price-to-earnings (P/E) multiple for the next 12 months (NTM). This reflects a major increase in its forward NTM P/E multiple over the past two years.
This can be seen in charts at Seeking Alpha and YCharts. They show that Apple’s P/E ratio three years ago in June 2019 was 15.9x and now the P/E is at 25x on a trailing 12-month (TTM) basis.
A second reason to short Apple is that it’s possible that Apple losing market share in its iPhone mobile phone sales. Counterpoint Research shows that Apple’s U.S. smartphone market share fell from 56% in the fourth quarter of 2021 to 50% in the first quarter of 2022. Moreover, Apple is reported to be having problems in its iPhone manufacturing operations and cut production at the end of March.
In its April 28 conference call, Apple said it would experience $4 to $8 billion “constraints” in its manufacturing and shipping operations. Apple also expects its gross margins to fall to between 42% to 43%. The gross margin was 43.7% in its latest quarter.
Third, U.S. real disposable income has declined in the past several quarters. The Federal Reserve Economic Data (FRED) site shows that monthly real (after inflation) disposable income has fallen 5.19% from April 2021 to March 2022. Inflation will cut consumers’ ability to spend money on things like iPhones.
What APPL Stock Could Be Worth
Apple produced $69.815 billion in free cash flow (FCF) in the last six months.This reflects a 35.5% FCF margin. However, the FCF margin fell to just 26.6% in the latest quarter.
Assuming the margin falls to 25%, If we apply this against the $394 billion in revenue forecast for 2022, we get an FCF estimate of $98.5 billion. Next, if we assume that this FCF is valued by the market at a lower than normal 15x multiple, the target market cap of $1,477.5 billion.
AAPL stock has a market cap of $2,167 billion. In other words, AAPL stock could fall by 31.8%. That would put the stock's value at $91.21, compared to its closing price on May 20 of $137.59. We can use this to figure out what strike price to buy puts at.
Buying AAPL Puts
Barchart's option series for puts 2 months out on July 15 show that a $125 strike price put has the largest number of put contracts - over 33,000 as of May 20. That could signal that Burry is in that position.
As of today it costs $5.10 per put contract in the middle between the bid and ask prices. This means that each contract costs $510. Moreover, to start to make a profit, AAPL stock has to fall below $125.00 - $5.10, or $119.90. That represents a decline of just over 12.8% from today's price of $137.59.
So, if you think there is a good chance, as our analysis shows, that AAPL stock could fall below $119.90, buy these July 15 $125.00 strike price puts. You have two months for this trade to work out. At least you know you will are likely in good company with Michael Burry.