In after-hours trading, Apple (AAPL) fluctuated wildly from big to small loss, and was actually in the green in pre-market trading on Tuesday. Meanwhile, sell-side analysts released conflicting post-earnings reports. The market’s response to Apple’s earnings can be summed up in one word: confusion.
First, the numbers. The quarter’s EPS of $8.26 beat estimates by 33 cents, and revenues of $37.47 (4% year-over-year growth) beat by $630 million. Forward guidance was at consensus, at a range of $55-$58 billion.
Without going into details of device sales growth, the numbers on their own seem impressive, but the market’s immediate reaction was highly negative. Again, the Keynesian beauty contest is an important parable for how markets work; while Apple’s results were a good beat, they weren’t as good of a beat as investors had hoped, causing a knee-jerk sell-off in after-hours. Of course savvy investors saw this as a buy opportunity, which is why the stock has recovered and came into the green in pre-market trading.
Part of the problem of a stock like AAPL is its popularity. The more popular the stock, the more focus, attention, and knowledge there is around it. This makes it harder to differentiate your own knowledge from the market, which in turn lowers your returns. The differing sell-side reports post-earnings and the market’s fluctuation is more likely the market debating what it knows about AAPL than it is a debate about AAPL’s intrinsic value.
How can you identify how much debate is around a stock, and how much focus it has in the market? You can count headlines, but you can also look at option premiums. In general, the higher the option premiums on both the call and put sides, the more there is anticipation of a big fluctuation in the stock’s value. That expectation can be driven by fundamentals or debate on the market’s understanding of the stock’s fundamentals. Either way, knowing just how fervent the debate is, and just how many market participants are in the debate, can help you understand the differentiated value of your own opinion and attention.