Name That Trade – $QCOM: The Good, The Bad, And The Ugly

by Dan March 17, 2015 12:01 pm • Commentary

Last week QCOM announced a “Major Increase in Capital Return Program“:

Available Stock Repurchase Authorization Now $15 Billion

Annualized Dividend Increased 14% to $1.92 per Share

Plans to Repurchase $10 Billion in Stock within Approximately Twelve Months in Addition to Commitment to Return a Minimum of 75% of Free Cash Flow to Stockholders

In Friday’s Notable Options Activity post I highlighted some very short dated call buying and the price action since the capital return announcement, which frankly has been downright horrible:

QCOM – The stock had a bad week, despite Monday night announcing that the company would dramatically increase their share repurchase, and accelerate a large portion of it.  Initially trading up nearly 5% to two month highs, only to close on the dead lows of the week, down nearly 7.5% from the highs:

QCOM 6 day chart from Bloomberg

Despite the stock once again in a nasty downtrend that has been in place since mid 2014, one trader looked to play for a rebound over the next week. When the stock was $68.40 an opening buyer paid 29 cents for 11,500 March 70 calls. That’s wagering $333,500 that the stock will be above $70.29 on this coming Friday’s close, or up about 2.7%.   Given the series of lower highs and lower lows that has been the course of things since July, and the massive reversal after good news, that premium might have been better used playing for a re-test of $65 in the coming weeks/months

To say the stock is at a tricky spot would be an understatement.  Here is a quick rundown from where I sit:  

The Good: obviously increased capital return, including a portion to be accelerated. Pristine balance sheet, no debt, 2.75% dividend yield. PE at a 10 yr low. trades below market multiple.

[caption id="attachment_52025" align="aligncenter" width="600"]QCOM 10 yr trailing P/E from Bloomberg QCOM 10 yr trailing P/E from Bloomberg[/caption]


The Bad: growth has decelerated massively:

[caption id="attachment_52026" align="aligncenter" width="600"]QCOM eps growth & estimates per Bloomberg QCOM eps growth & estimates per Bloomberg[/caption]


The Ugly: rumors that INTC has beaten out QCOM for LTE chips in next iPhone, and that Samsung dropped their SnapDragon from latest Galaxy. Apple and Samsung make up about 20% of QCOM’s sales.  INTC has been losing a lot of money in mobile chips, some big design wins against entrenched players like QCOM could signal a turn of the tides.

Intel to reportedly supply LTE chips for 2016 iPhone from AppleInsider:

Apple tapped Infineon to provide chipsets for the original iPhone introduced in 2007, and continued to source silicon from the firm until it was bought out by Intel. Apple has since relied on wireless chips from Qualcomm, but the publication’s sources said Apple has an “uneasy” relationship with the company.

Samsung Galaxy S6 Specs Rumors: Qualcomm Being Dumped

The company first planned on using the Qualcomm Snapdragon 810 SoC in the device; however recent reports suggest that the company will instead be using one of its own Exynos processors.

Oh, and the technical set up is less than stellar, with the stock hovering around a fairly key level of $70. That has the potential to become massive resistance:

[caption id="attachment_52027" align="aligncenter" width="600"]QCOM 1yr chart from Bloomberg QCOM 1yr chart from Bloomberg[/caption]

So the real issue here is whether or not the company will have to pre-announce fiscal Q2 results that are scheduled for April 22nd.  This has obviously become a huge concern since INTC’s negative pre-announcement last week.

If market sentiment turns a bit more positive, and if the dollar were to weaken a bit, large cap tech could be set up for a trade-able rally. If this were the case, then a stock like QCOM could be attractive with the tailwind of massive buybacks.

Near-term I would expect $75 to serve as resistance. And I would isolate the late April earnings event as the catalyst for the shares.

Hypothetical long biased trade:

QCOM ($70) Buy May 70/75/80 Call Butterfly for 1.25

-Buy 1 May 70 call for 2.80

-Sell 2 May 75 calls at .90 each or 1.80 total

-Buy 1 May 80 call for .25

Break-Even on May Expiration:

Profits: up to 3.75 between 71.25 and 78.75 with max gain of 3.75 (3x your money) at 75

Losses: up to 1.25 between 70 & 71.25 and between 78.75 and 80 with max loss below 70 or above 80

Rationale:  The trade set up at the moment is dicey at best, and the company will enter a quiet period prior to their Q2 earnings where they can not buyback stock. But I would expect them to aggressively buy shares following any weakness from a disappointment.  I see the upside/downside fairly even at about $65 on the downside, and 75 on the upside, which could lend itself to defined risk directional trades for those with a view.  I am not there yet, I want to see how the stock continues to act in around key technical resistance.

One last point, If I were playing would you rather, QCOM or INTC I would be inclined to choose QCOM given their stated intent to buyback stock.