(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NXPI.)
NXP Semiconductors N.V. (NXPI) stock may be an early casualty of the trade war brewing between the U.S. and China. Regulators in China have still not approved Qualcomm Inc.'s (QCOM) $44 billion acquisition of NXP, and time is running out to approve the deal by the end of today.
As a result, shares of NXP have plunged by more than 20% from their all-time highs of roughly $126 in January, options traders are betting that the pain for NXP's stock is not over and may decline by another 12%, with shares falling to about $87.50 from its current price around $99.50: nearly $30 below the $127.50 deal price proposed by Qualcomm.
Massive Bearish Bets
The long straddle options strategy for expiration on Aug. 17, is pricing in a stock rise or fall of roughly 14.5% from the $100 strike price. It places the stock in a trading range of $85.50 to $114.50 by expiration. The number of bets NXP will fall massively outweigh the wagers the stock will rise by a ratio of about 5 to 1, with 45,000 open put contracts to only 8,500 open call contracts. The dollar value of the open puts is $35.1 million—a huge bet.
A 12% Drop
Some traders are betting the stock falls by over 12% by the middle of August. The puts at the $90 strike price have an open interest of nearly 64,000 open contracts. The puts trade at roughly $2.50 per contract, and a buyer of those puts would need the stock to fall to $87.50 to break even if holding the options until expiration. The dollar value for the open puts at the $90 strike price is a massive $16 million, a large wager given the short-time until expiration—and how far the stock must fall to be profitable.
The longer-term outlook for the stock may not be as dire as the options market is betting over the short term. Shares of NXP trade at roughly 13 times 2019 earnings estimates of $7.62. The earnings growth for the business is forecast to grow by 12% in 2019, and by over 13% in 2020. When adjusting the stock for 2019 earnings growth, the PEG ratio is at just 1.07.
The fallout of a deal breakup appears to be bearish for NXP over the short term. But it may not take long for investors to find the value that NXP offers as a standalone business should the company deliver robust growth as forecast.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.