Update – Chipping Away at $QCOM

by Dan April 15, 2016 2:06 pm • Commentary• Trade Updates

Yesterday we had some thoughts on Taiwan Semiconductor’s (TSM) Q1 earnings disappointment and what it might mean for the rest of the PC and Smartphone supply chain (Chips and Dips):

This outlook should be concerning to Apple (AAPL) and Qualcomm (QCOM) investors as the two are TSM’s largest competitors, with 15 and 17% revenue exposure respectively.  I suspect at this stage of the game this is not a massive surprise though as analysts have modeled a 14% year over year decline for AAPL’s eps and 39% sequentially, vs a 40% increase in eps last year same quarter and a 24% sequential decline last year same quarter.  As for QCOM they are expected to report a 31% decline yoy decline in their March quarter, vs a 7% increase last year, and a 1% sequential decline vs a 4% increase last year same period.  The main point here is that expectations are not particularly high for TSM’s two largest customers.

Today AAPL and its supply chain are under pressure after Nikkei’s Asian Review is reporting that Apple extends iPhone production cut for another quarter:

TOKYO — Apple will continue its reduced production of iPhones in the April-June period in light of sluggish sales, according to parts suppliers notified of the plan.

Slow sales of the flagship iPhone 6s and iPhone 6s Plus, which debuted last autumn, have forced Apple to adjust inventories. It lowered production for the January-March quarter by about 30% from the year-earlier period. With sales still sluggish, the U.S. company has told parts suppliers in Japan and elsewhere that it will maintain the reduced output level in the current quarter.

Apple apparently does not plan to produce a large enough volume of the small iPhone SE released last month to offset the slump of its flagship series. However, should Apple decide to release its next flagship model earlier than the usual September launch, parts production for that smartphone could take off around late May.

In early March, we placed long premium short delta trade on in QCOM targeting next week’s April w0th Q1 earnings event, to refresh here was the trade from March 8th when the stock was $53:

QCOM ($53) Bought April 22nd Weekly 53/43 Put Spread for $2
  • Bought 1 April 22nd weekly 53 put for 2.30
  • Sold 1 April 22nd weekly 43 put at .30

The stock is now $51.60 as I write, and the $10 wide put spread is worth a little more than we paid. When we entered the trade we preferred the wide put spread as we thought there was a good chance that the stock would work lower, but now as we are slightly in the money, with 5 trading days to the earnings event, and 7 days until expirey we are going to roll the spread down and out a little bit so that a small rally next week won’t annihilate all of the premium we have at risk.

UPDATE: QCOM ($51.60) Sell to Close April 22nd weekly 53 / 43 Put Spread at $2.20 for a 20 cent profit

NOW I WANT TO ROLL THIS BEARISH VIEW: But I want to add a few points why i would quickly reverse a near term bearish view if the stock were to go back near the February lows.  I think the stock needs one more expectation re-set lower:

QCOM reports April 20 after the close. Implied move is about 6%, the avg over the last 8 qtrs has been about 7%, all have been declines, ugh.

QCOM is up 3% on the year, up 20% from its 52 week lows made in Feb.

Very cheap trades 13x expected 2016 eps, great balance sheet, 39% of their market cap is in cash, 25% net of debt, monster share buyback, 4% dividend yield.

BUT likely one more blood letting given the current state of the high end smartphone markets.

AAPL 5% customer, Samsung 10%

NEW TRADE: QCOM ($51.60) Buy to Open the May 52.5/45 put spread for 2.00
  • Buy to open the May 52.5 put for 2.30
  • Sell to open the May 45 put at .30

Break-even on May expiration –

Losses of up to 2.00 above 50.50 with total loss of 2.00 above 52.50

Profits of up to 5.50 below 50.50 with max gain of 5.50 at or below $45.

Rationale – This roll takes a little bit of risk off the table and extends our time-frame beyond earnings week to May expiration. It tightens up the strikes a bit to help reduce premium risk so the payoff to the downside isn’t as large, but it is more realistic with more time.