Morgan Stanley’s $1.7 million trigger jump on Apple offer attractive risk-adjusted return

By Emma Trincal

New York, Dec. 9 – Morgan Stanley Finance LLC’s $1.7 million of 0% trigger jump securities due Dec. 3, 2025 linked to the stock performance of Apple Inc. offer a reasonable bet on Apple, allowing investors to generate double-digit returns even in a slower global economy, said Clemens Kownatzki, finance professor at Pepperdine University.

If the stock finishes at or above its initial level, the payout at maturity will be par plus 54.1%, according to a 424B2 filing with the Securities and Exchange Commission.

If the stock falls by up to 20% from its initial level, the payout will be par.

Otherwise, investors will be fully exposed to stock decline from its initial level.

Ups and downs

“It’s an interesting note. Very straightforward. Looking at the price of the stock, it almost shows a zig-zag formation,” Kownatzki said.

The 52-week high was $183 in January. In mid-June, the share price dropped to a $129 low.

“Meanwhile you had a double top in April and in August. Each had a retracement,” he noted.

In mid-June, the stock was 28% off its high of April, rose to a new high in August and from there, declined by 24% to a new low in October.

When the notes priced, the stock closed at $148.

“That’s nearly 20% below the peak of January. Not a bad entry point.”

Street consensus

Given the digital structure of the notes, investors need to have a view on Apple, but not necessarily a bullish one, he said.

“You only need to finish up,” he said.

S&P Capital IQ anticipates modest growth over the next three years, predicting a 3% to 5% growth range per annum, he said.

“They’re pretty much in line with the consensus,” he said.

Several factors explained those calls.

“Apple is a behemoth. It is the largest company in the world by market capitalization,” he said.

“When you have that size, you can’t generate record profits and revenues for ever. There is a physical limitation to growth.”

Recession risk

Another factor is the global economy showing signs of weakness, especially in Europe, he said.

The U.S. is likely to be in a recession next year, according to many analysts.

“The yield curve spread between the two year and the 10-year is -80 basis points, the most negative spread in forty years. An inverted yield curve is typically a precursor of a recession,” he said.

“Even a company as robust as Apple is not recession-proof.”

While the note would not be a good fit for bulls, its payout structure may allow investors to generate double-digit returns in a slow economic environment.

“If you believe that we’ll have bumpy times ahead and that Apple’s profit growth may be modest, then having 54% over three years is great,” he said.

“From that perspective, I actually like the note.”

Narrow range

Kownatzki was more concerned about the downside risk.

“Apple shares can easily have a 20% retraction or even more,” he said.

“Is it going to happen over a three-year period? It’s a hard guess. But for a stock like Apple, which has shown several peaks and valleys on the chart, there is a risk. The 20% protection band seems a bit narrow.”

To protect the downside, Kownatzki said he would buy options.

“It would come at a cost, but I would not deploy the strategy right away. I would wait to be closer to the expiration, maybe six months ahead of the maturity date, so I could lower the cost of my protection.”

In addition, Apple as a technology leader faces several headwinds.

What’s next

The market has expected Apple to come up with a technical innovation for some time and nothing significant has really come out since iPhone and iPad,” he said.

“They have to meet very high expectations from consumers and investors alike. So far, they’ve improved their products, but we haven’t seen the next Big Thing yet,” he said.

Apple also faces fierce competition from Samsung and Google in the smartphone space in addition to threats from rivals like Lenovo and Hewlett Packard in the computer market.

Another risk is Apple’s strong dependency on China to manufacture its products, he said.

“China carries risk,” he said, citing supply chain disruptions, zero-Covid policies, trade agreements with the U.S. and tensions with Taiwan.

“Even from a PR standpoint, [Apple CEO] Tim Cook has been criticized for restricting AirDrop access in China during a time of protests,” he said.

Apple’s plans to relocate its facilities outside of China such as in Vietnam for instance will increase the company’s costs and could hurt its earnings, he noted.

Risk-return

Despite those challenges, Kownatzki had a positive outlook on Apple.

“Apple is a cash-cow company. It’s still going to grow,” he said.

“If I had to guess what’s the most likely scenario between – getting 54% on the upside or losing at least 20% on the downside – I would bet on the upside.

“The stock could go down over the three-year period, but probably not dramatically so. You could have a 10% drop and you wouldn’t lose any principal. On the upside, getting a 54% return over a three-year period is not shabby.

“From a risk-return perspective, it’s an attractive note.”

The notes are guaranteed by Morgan Stanley.

Morgan Stanley & Co. LLC is the agent.

The notes settled on Dec. 5.

The Cusip number is 61774Q280.

The fee is 3%.

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