Name That Trade – $QCOM: Phone Home

by Dan July 23, 2014 2:49 pm • Commentary

QCOM reports their fiscal Q3 tonight after the close. The options market is implying about a 3.25% one day move tomorrow, which is basically inline with the 4 qtr avg.  Relative to other large cap tech stocks that have reported over the last couple weeks, the implied move does not look optimistic for fireworks, as most have had implied moves that have been greater than their averages.  What I also find interesting about this is that XLNX is down 15% this morning after reporting worse than expected results and guiding down, citing per Bloomberg:

due to Chinese LTE deployments likely being delayed by a quarter into December. Inventory at equipment manufacturers such as Huawei, Ericsson and ZTE increased and probably surpassed demand, driving this weakness.

So how are things for QCOM in China? Bernstein analyst Stacy A. Rasgon, had the following to say in research noted dated July 22nd:

The ramp of LTE in China continues to be a primary controversy on Qualcomm’s stock, as delays
of LTE device rollouts in the region have pressured the company’s licensing growth. However,
recent data on Chinese handset shipments suggests we are now solidly seeing the start of the 4G
ramp in the region.

Chinese smartphone sales have been disappointing recently, catching even Qualcomm by surprise, with later-than-expected ramp of LTE phones in the region blamed for shortfalls in licensing outlook vs. expectations.

However, we now have evidence that 4G devices in China are solidly ramping. According to the latest June data from the China Academy of Telecommunications Research, 4G devices ramped substantially in Q2, with 31M LTE devices shipped in China (~15M in June alone) compared to only ~10M shipped in Q1

Taking this into account it would appear that expectations for the current quarter are not particularly high, but with Apple’s reported strength in iPhone in the region, and their likely continued success with the new phones in the fall, QCOM, who is largely attached to Android manufacturers, could see tough competition for the last three months of the year as Samsung wont have a high end smartphone into until March or April of 2015.

Taking a quick look at the technical set up, the stock has been amazingly rangebound for the better part of this year, trading between $78 and $82 since early April.  On numerous occasions the stock has flirted with a breakout to new 14 year highs:

QCOM ytd chart from Bloomberg
QCOM ytd chart from Bloomberg

Given the stock’s 5% rally over the last week, my assumption is that an inline qtr and an inline guide could be discounted, while the low implied move could cause a healthy breakout (think INTC last week up 8%) on a beat and raise.  And the worst case scenario would be a miss and guide down making the stock vulnerable at least to the $78 level, but possibly back towards the 200 day moving average just below $76.  

For those that think the stock has a fairly muted move, the August in-the-money flies look decent from a risk/reward perspective. For example the Aug 77.5/82.5/87.5 call fly is about 2.25. Break-even is 79.25 on the downside and 85.25 on the upside.

A slightly bearish version of that centering the trade at 80, the Aug 85/80/75 put fly is about $2.00, making the break-evens at 77 on the downside and 82 on the upside.

The risk on both of those is a sharp move higher or lower but the options market isn’t really looking for one.

For those looking to play for a INTC sort of breakout the July 25th 82 calls are dollar cheap at 1.27, needing a move above $83.27 or up a little more than 1.5%, so to make money you need to get first and foremost direction right, then magnitude of the move, and obviously time will not be on your side.