$QCOM Fiscal Q1 Earnings Cheat Sheet

by Enis January 29, 2014 7:50 am • Commentary

Event:  QCOM reports its fiscal Q1 earnings today after the close.  The options market is implying about a 4% one day move, which is in line with the 4 qtr average of about 4.15%, and the 8 quarter average of about 4.15%.

Sentiment:  Wall Street analysts have been quite positive on QCOM, despite its underperformance relative to broader indices, with only a 15% return over the last year.  They have 37 buys, 8 holds and 2 sells on the stock, with an average 12 month price target of $78.29.  Short interest is negligible, at only 1.3% of the float.  The stock did hit a new 10 year high this month.

Options Open Interest:  QCOM options volumes have favored calls for much of the past year.  Total open interest is skewed towards calls vs. puts by a ratio of about 1.6 to 1, and the 1 month average volume is about 2.1 to 1, once again in favor of calls.  The strikes with the largest open interest for the next 3 months of expiries are the Feb 75 calls (18k) and the Apr 80 calls (27k).  In Jan15, the 52.5 puts and 72.5 calls both have over 35k of open interest (a risk reversal that traded).  The Jan15 70 puts also have 14k of open interest.

Price Action / Technicals:  Despite QCOM’s weak relative performance vs. the rest of the tech sector, its overall long-term uptrend actually looks much healthier compared to many of the parabolic moves we’ve seen over the last year.  The stock is in a  steady 3 year uptrend channel, and has significant long-term support around the $60 level:

QCOM weekly, Courtesy of Bloomberg
QCOM weekly, Courtesy of Bloomberg

The uptrend line comes into play on the downside around the $65 level.  Shorter-term support is at the obvious psychological level of $70.  On the upside, the stock’s high from last week of $75.90 is the only real resistance level until QCOM’s all-time high of $100 set in January 2000.

Volatility:  Implied volatility in QCOM is much lower than it has normally been prior to earnings over the past 2 years:

QCOM 30 day implied volatility, Courtesy of LiveVolPro
QCOM 30 day implied volatility, Courtesy of LiveVolPro

Two main reasons for this drop in QCOM implied vol.  First, overall market implied vol was quite low until last week.  Second, QCOM stock has been in the 70-75 range for much of the past 2 months.  However, if QCOM implied volatility moves back to the high teens after earnings, buying options might be a good way to structure directional opportunities given the cheap implied volatility.

Our View:  The recent weakness in the smartphone market overall (see Samsung and Apple earnings) is a cause for concern for QCOM.  The stock broke below its 50 day average yesterday on AAPL earnings for the first time since mid-November.  While QCOM is quite diversified when it comes to chips for mobile devices, with no one manufacturer dominating its revenues, the overall market weakness will certainly be on investors’ minds when QCOM shines more light on 2014 guidance.

However, one major positive for QCOM is its stellar financial position and relatively cheap valuation.  At 18x 2013 earnings, with 10-15% average earnings growth expected for the next 2 years, the stock is a better priced company than most large-cap tech companies.  The reason for the cheap valuation is the skepticism in the market on the earnings growth over the next couple years.  If QCOM can match those analyst estimates, the stock’s likely headed higher.  On the other hand, a cut in near-term guidance a la AAPL could see the stock test $65 support in the coming weeks.