Event: QCOM reports its fiscal Q4 earnings tomorrow after the close. The options market is implying about a 3.5% one day move, which is below the 4 and 8 quarter average of about 4.25%.
Sentiment: Wall Street analysts have been quite positive on QCOM, despite its underperformance relative to broader indices, with only a 3.5% return in 2014 They have 28 buys, 11 holds and 2 sells on the stock, with an average 12 month price target of around $84. Short interest is negligible at only 1% of the float.
Options Open Interest: Total open interest is skewed towards calls vs. puts by a ratio of about 1.1 to 1, and the 1 month average volume is about 1.3 to 1, once again in favor of calls. For short-term maturities, the Nov22nd 77.5 and 80 calls both have over 10k of open interest. For longer-term maturities, the Jan15 72.5 and Jan15 80 calls both have over 30k of open interest, the most of any strike.
Price Action / Technicals: QCOM tested its $69 breakout level on the selloff in mid-October, quickly snapping back higher along with the broader market:
[caption id="attachment_47671" align="alignnone" width="600"]
QCOM weekly chart, courtesy of Bloomberg[/caption]
However, on the daily chart, the stock has failed to get above $80 ever since its nasty earnings gap lower in late July:
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QCOM daily chart, 200 day ma in yellow, courtesy of Bloomberg[/caption]
There is significant overhead supply in the stock between $78 and $82 from the trading between April and July, so I’d be surprised to see the stock get through there with no issues. Add to that the fact that the stock has remained below its 200 day moving average for most of the time over the past 3 months, and QCOM’s recent rally looks to offer more downside risk than upside reward on a technical basis.
Volatility: 30 day implied volatility in QCOM has been on a wild ride in the past month, but is now near where it was in late July prior to the last earnings report:
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QCOM 30 day implied volatility, courtesy of Bloomberg[/caption]
Implied volatility does look low given the recent volatility in the shares as well as the earnings event, but options traders seem to expect that the stock will calm down once earnings is out of the way.
Our View: QCOM has consistently been viewed by investors as a Growth at a Reasonable Price stock over the past 5 years. However, the “Growth” part of that equation is starting to get strained.
QCOM is a 15x P/E stock, so the valuation remains quite reasonable. But EPS growth over the next 2 years is only expected to average around 5-6%, on sales growth of about the same. That’s a far cry from the 10-30% EPS growth over much of the past 5 years. More worrying perhaps is the possibility that the smartphone market has become saturated in the near term, which could hurt QCOM and possibly cause flat EPS growth over the next year.
With the stock pushing against technical resistance, and the fundamental backdrop far from stellar, the risk/reward in QCOM shares seems skewed to the downside for the first time in many years.