Big Printin’ – QCOM, QRVO: Semi-Palooza

by riskreversal September 29, 2016 4:00 pm • Big Printin'

Media reports that Qualcomm (QCOM) is in talks to acquire NXP Semiconductors (NXPI) for $30 billion sent the Philadelphia Semiconductor Index (SOX) up nearly 3% in a straight line, as NXPI ripped 15% and QCOM shares saw steady gains, up 6% as I write.  Since the start of 2015 there has been about $200 billion in semiconductor m&a as the PC & Smartphone markets mature, component suppliers are desperate to diversify into emerging technology products & platforms like the artificial intelligence (AI), augmented & virtual reality, Internet of Things (IoT), autonomous cars, drones etc.  To refresh your memory, here are some of the tickers that no longer exist on your quote screens:

Analog Devices (ADI) is making a near $15 billion offer to acquire Linear Technology (LLTC)

ARM Holdings (ARMH) of the U.K. agreed to be acquired by Japan’s Softbank for $32 billion.

Western Digital (WDC) paid $16 billion for NAND flash chip maker Sandisk (SNDK)

NXP Semiconductors (NXPI) made a nearly $12 billion bid for Freescale (FSL)

Avago Technologies (AVGO) paid $37 billion ($17b cash & $20b in stock) for Broadcom (BRCM)

Intel (INTC) bought Altera (ALTR) for $17 billion in all cash

And here is some apparently directional options activity that caught my eye in the semiconductor space today:

QRVO: Qorvo, a communications chip company, frequently speculated as a takeover candidate with a $6.8bn market cap saw long dated call buying despite being down on the day.  Shortly after the NXPI news hit, when QRVO was trading $54.25 there was an opening buyer of 2900 Jan 65 calls paying $1.70, or $493,000 in premium. These calls break-even at $66.70, up 22% from the trading level. The same buyer paid $3.30 for 1500 of the May 70 calls to open, or $495,000 in premium.  These calls break-even at $73.30 on May expiration, up 35% from the trading level.

If you were inclined to play for a takeout in a stock like this it might make sense to define you risk. Since the combination of Triquint Semi and RF Micro in Jan 2015, to form QRVO, the stock has traded as high as $89 in June 2015 and as low as $33 in February of this year. $50 appears to be a level worth using as downside stop for longs, while $70 seems like a fair target at the very least given recent takeout multiples in the space, at $70 that is about a $9 billion market value or about 3x expected f2017 sales.

[caption id="attachment_66729" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]


QCOM: options volume exploded as did the stock out of a fairly tight consolidation between $60 and $64.50 since gapping to new 2016 highs following its Q2 earnings in late July:

[caption id="attachment_66730" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

While total options volume was 9x average daily, the put call ratio was only 1.2 to calls, yet the two largest trades of the day appear to be opening buys in puts. When the stock was $66.70 shortly after the media reports hit, there was an opening buyer of 6,000 Jan 65 puts, paying $3.15, or $1.9 million in premium. Shortly after that trader there was an opening buyer of 5,500 of the Jan 62.50 puts, paying 2.10, or $1.15 million in premium.  Who knows if this is protection against a long position, but the stock’s gains suggest that investors are fairly happy with the use of cash if it is not much higher than the reported $30 billion price tag. I suspect with today’s gains a trader could justify paying in put protection on a large holding if the price ends up being much higher, or no deal materializes.