APPL: Gary Cheng. Playing the WWDC Event.


Apple (AAPL) will kick off its annual Worldwide Developers Conference (WWDC) on June 10, 2013 in San Francisco. Every year, Apple utilizes this event to unveil a range of upgrades or new additions to its hardware and software line-up. As the table below shows, Apple typically releases major operating system upgrades to its iOS for smartphones/tablets or Mac OS X for Macs at the event. There were times when Apple would also showcase new hardware upgrades such as new iPhone or improved Macbook Pro/Air laptops.

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(Source: Apple)

Apple’s secrecy is well documented and has been successful at keeping investors in the dark on most future products including features and release timing. Similarly, it has kept quiet on what will be announced at this WWDC event. As we are closing in on June 2013, there has already been much discussions, rumors, and media conjectures regarding what Apple will make public at the event. Therefore, the WWDC can turn into one of the few occasions during the year in which Apple communicates to the investor and user community to provide valuable new information with better clarity which investors can put to use in realigning their near term expectation on the strategic direction that the company is undertaking.

USAToday and tech news site Digital Trends have a good round up of the general expectation of what Apple will make public at the event which is consistent with my read of various media reports and industry analysts comments. Apple is widely expected to announce the new iOS 7 and possibly Mac OS X 10.9. Reports from CNETGigaom, and others also suggest that the new iOS 7 look-and-feel would represent a new departure in design style. However, most of the new features rumored to be incorporated look to be more evolutionary iterations of improvement rather than revolutionary.

According to comments from KGI Securities analyst and Digitimes reports, Apple is also preparing to update Macbook Pro/Air laptops at the WWDC event. Since Intel just recently released its Haswell processor for personal computers that offers impressive power-saving features along with a powerful CPU, I will not be surprised that Apple will quickly update their Macs to make use of the new features in order to ramp up sales. However, I believe it’s unlikely that incremental increase of Mac sales would be able to add much to the bottom line of Apple which derives substantially most of its revenue from iPhone and iPad sales. There are a long list of other products rumored to be in the works or predicted to be available soon by Wall Street analysts and others on iPhone 5S, a low cost iPhone, a larger-screen iPhone, iPad Mini 2, iPad 5, iWatch, iTV, and iRadio, but their imminent release in June seem not to be highly anticipated. In a sense, investors and the media seem to think that this WWDC event will be mostly about software and have low expectation on the release of other major hardware updates.

Under this context, a trade buying Apple shares prior to the WWDC event and then exiting after the event could potentially be profitable. This event driven trade is meant to exploit current low expectation and seeks to take advantage of and capture any big upside surprise that might have come out of the WWDC event which I believe the market has not priced in.

I backtested this event trading strategy using trading data before and after the annual WWDC event from 2007 – 2012. My strategy involves buying Apple shares on the two Fridays prior to the event and then exiting the position on the second to sixth Fridays post the event with holding period lasting from 28 – 56 days. There are a number of ways this strategy could be backtested with variations in how early investors want to buy Apple shares and the length of the holding period and may show different results.

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Although there were only six annual data points in my study, the results nevertheless provided the following insights:

  • There was fairly strong short term correlation between the WWDC event and Apple share price. The strategy was profitable for 4 out of 6 years (67%) if the stock was held for 28 – 35 days with an average return of 5%. If holding period is extended to 42 – 56 days, the success rate increased to five out of six years (83%) and the average return also rise to 6% – 10%.
  • In the early years of 2007 – 2010 when iPhone was the only dominant smartphone in the market, initial reaction after each announcement was very positive and it was reflected in the strong share price. 2008 was probably an anomaly due to the ongoing financial crisis at that time.
  • The return was negative in 2011 when Apple suddenly decided to de-couple the release of the new iPhone hardware with the iOS upgrade and the market seemed to be negatively surprised. However, in 2012 when Apple again followed suit, the market was not as negatively surprised and instead focused on the other positive aspects of the event.
  • Downside risk has previously been limited – from -3% to -9% – depending on the holding period.
  • A hardware upgrade together with a software refresh (2008 – 2010) would have a much bigger positive impact than just a software refresh (2011 – 2012).

Compared to a few weeks ago, Apple’s chart is showing a markedly improved technical position. Its share price has stopped declining and is beginning to move sideways between the range of $420 – $460 to build a bottoming formation. A big upside surprise from the WWDC event could be the catalyst needed to help move share prices back above $500 level. The sideway share price movement can also help to mitigate the downside risk of this trade in the event that investors are underwhelmed by the WWDC announcements.

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