Considering Our Options $QCOM – Down But Not Out

by Enis April 25, 2013 9:52 am • Commentary

A quick update on where we stand after earnings with our trade in QCOM from yesterday.  

The stock is now at important support, and ideally it holds here and stabilizes.  62.25 is the unchanged level on the stock for 2013, so that’s the key level I’m watching.  Since our trade structure expires in June, we still have plenty of time for the stock to bounce.  Moreover, the actual earnings report, and even the purported weak guidance, did not seem too concerning overall, so at the least, we do expect to get a chance to exit the trade on a bounce in the stock back to the 65-67.5 area in May or June.

Once again, the benefit of this trade structure is that we were wrong on direction, but still have a decent trade on our hands if the stock rallies from here.  The trade is now worth around $1.40 with the stock around 62.75, down from the 1.78 price that I paid.  But I’m long delta in an area that I think the stock is a decent buy, and had some exposure before earnings just in case it was a non-event.  In short, risked much less than most earnings-related bets, and still have plenty of time and flexibility to manage the trade into a winner. The risk to the trade at this point is a break down from these levels. We’ll update if we make any moves.


Original Post April 24th, 2013:  New Trade $QCOM – Stay Classy San Diego

QCOM’s a cheap stock, with good growth prospects, a decent yield and buyback, and a diversified business in the right area of the chip sector.  But that’s been true for many, many months now, and the stock has failed to rally much.  Analysts and traders love it, but someone’s been selling the entire time.

We’re not sure whether this is the quarter that QCOM finally breaks out.  But given the clear range that it has traced out between 62.5 and 69, we like another slightly bullish range bound bet in QCOM to take advantage of elevated implied vol.  It’s a lower risk / lower reward trade to start, but it gives us plenty of time to get out for a profit in the coming weeks as long as QCOM doesn’t make an outsized move.

TRADE: QCOM ($66.34) Buy the June 62.5 / 67.5 / 72.5 Call Fly for $1.78
  •  Buy 1 QCOM June 62.5 Call for 4.74
  • Sell 2 QCOM June 67.5 Calls at 1.66 each for a total of 3.32
  • Buy 1 QCOM June 72.5 Call for 0.36

Break-Even on June Expiration:

  • Profits of up to 3.22 btwn 64.28 and 70.72, maximum gain of 3.22 at 67.50
  • Losses of up to 1.78 btwn 62.50 and 64.28 and btwn 70.72 and 72.50, with max loss of 1.78 at or below 62.50 and at or above 72.50

Payout Diagram:

[caption id="attachment_25177" align="aligncenter" width="513"]Screen Shot 2013-04-24 at 1.04.14 PM from TradeMonster[/caption]

Trade Rationale:  Dan laid out his view in the earnings preview below.  Ideally, we’d just put on a long delta trade if the stock fell to 62.50, and hold from there.  Since that might not happen, this trade allows us long exposure above 64. and upside above the breakout area between 68 and 69.  We chose June in case we’re wrong and there is a big move.  With June expiry, we think we’ll have a chance to get out for close to breakeven if there is at least a retracement of the initial breakout move.


Original Post April 24th, 2013:  $QCOM Q1 Earnings Preview

Event:  QCOM reports Q1 earnings tonight after the close, and the options market is implying about a 4.5% move (using our Implied Move calculator here), which is quite close to the 4 qtr avg move of ~4.75% and the 8 qtr avg move of ~4.25%.

Sentiment:  Wall Street analysts are very bullish on QCOM, with 43 buys, 4 holds, and 2 sells, and an average 12 month price target of ~$76.  QCOM has been one of analysts’ favorite names in the tech space for years now.  The stock has negligible short interest and options open interest is skewed towards calls by a ratio of about 1.75 to 1.

Price Action / Technicals:   The chart over the past 2 years shows the crucial significance of the $68-$69 area as long-term resistance.  The stock failed in that area after its strong earnings report earlier this year.  I’ve drawn that area in red:

2 year daily chart of QCOM, Courtesy of Bloomberg
2 year daily chart of QCOM, Courtesy of Bloomberg

The obvious level of support is around the 200 day moving average (shown by the black line), between 62.50 and 63, from where the stock has bounced a few times already in 2013.  The upside resistance is a more important level from a long-term perspective, so 68-69 is key.

Fundamentals / Valuation:  In the last couple days, wireless chip competitors TXN and BRCM released results that were better than expected, despite some disappointing results from other mobile component suppliers and weak June quarter guidance last night from AAPL.   Samsung and AAPL make up almost 25% of QCOM’s sales with Samsung almost 20%.  Any Q2 Galaxy strength could offset expected iPhone weakness.  While U.S. investors remain focused on the high end 4G markets, QCOM is well positioned for the secular trend towards 3G in emerging markets, and QCOM could be a massive beneficiary from a new low end iPhone that could be launched in China, possibly at China Mobile later this year.

There are very few large cap tech companies that have the growth profile of QCOM that pays a dividend that yields more than 2%, a $5 billion share repurchase in place, 25% of their market cap in cash and no debt, with expected EPS growth of 13% this year and 10% next, while trading at a market multiple.

For comparison sake, INTC has a $116 billion market cap, ~$22 bil in cash and $13 bil in debt with earnings & sales that are expected to grow at low single digits with a 3.8% div yield.

QCOM has a ~$113.5 bil market cap, ~$28 bil in cash, no debt, with earnings and sales that are expected to grow 13% and 20% respectively with a 2.1% dividend yield.

What semi stock would you rather own, the one that cant get any earnings growth on double the amount of sales?  Obviously this preview is not about INTC but when you stack up the above financial metrics and look at QCOM’s exposure to growth areas in mobile it is a very easy decision on a relative basis.

Vol SnapShot:  QCOM IV has popped heading into earnings but is not massively high on a historical basis for earnings. Here’s a look at IV30 (red) vs HV30 (blue) over the past year:

Screen Shot 2013-04-24 at 10.25.37 AM
from LiveVol Pro

Weekly vol is pumped to the mid 60’s and May is just shy of 28. Weekly will go to parity by Friday while May IV should fall to the low 20’s or about 25% following the event.

MY VIEW:  In late December, and again in January we made a couple bullish trades in QCOM when the stock was weak on concerns regarding their AAPL exposure.  Since then the stock has traded decently after the stock’s recent 5% rally, but still under-performs the broad market up less than 7% ytd.  Since the company’s Q4 earnings gap in late Jan, the stock has made a series of lower highs and lower lows, and the recent rally could make a test of the previous highs on tonight’s print a little challenging.   I have been on the record as waiting for the opportunity to own QCOM below 65 and even better would be closer to support at $62 as a play on one of the best names in geographic smartphone adoption, but I am not sure at $66 with the SPX 2% from its recent all time highs is exactly the right spot to step in.  We are looking at a few options trades and will be sure to post any that we like into the print.