(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NXPI .)
Qualcomm Inc. (QCOM) has been trying for months to close its proposed $44 billion acquisition of NXP Semiconductors N.V. (NXPI). But trade tensions between the U.S. and China have gotten in the way, as the two companies await approval from regulators in China. Options traders are betting the deal doesn't get final approval and that shares of NXP will fall below $100—a drop of nearly 13% from its current price and over 24% below the deal price of $127.50.
The outcome of the deal weighs on Qualcomm as well, with shares of the stock nearly 14% off their highs from late January. The outlook doesn't look bright either if they are unable to close the deal to acquire NXP, plagued by falling earnings and revenue.
Options traders have been steadily increasing their bets that the deal doesn't go through. The options set to expire on July 20 at the $110 strike price have a put to call ratio that favors the puts by nearly 2 to 1, with roughly 46,400 open put contracts to only 22,000 open call contracts. It doesn't stop there because the $100 strike price puts have nearly 63,000 open put contracts, and that number has more than tripled since the middle of May, rising from 17,600 open put contracts. With the $100 puts trading around $3 per contract, shares of NXP would need to fall to $97 from its current price of roughly $111.80 for a buyer of the puts to break even, if held to expiration.
The completion of the deal with NXP would surely be a great benefit to Qualcomm and help the company diversify its portfolio and add a badly needed growth component. But the options market does not appear to be too optimistic.
Qualcomm's options set to expire on July 20 have nearly 44,000 open call contracts at the $60 strike price, heavily outweighing the puts by almost 4 to 1. But the cost of those calls is only $1.75, and that means a buyer of the calls needs Qualcomm's stock to rise by only 4%, to break even. Open interest levels drop off substantially as one goes up the option chain.
Barometer for Tensions
A potential trade war with China is standing in the way of this deal from happening since the it needs final regulatory approval from the Chinese government. Neither Qualcomm nor NXP is China-based, but China still has jurisdiction.
Because of these trade tensions, NXP stock has become a barometer for the mood of the market concerning a trade war, with shares rising when tensions appear to be easing and shares falling when tensions appear to be building.
It is unfortunate that both Qualcomm and NXP got caught in a political mess, but right now the market doesn't believe the outlook for the deal's completion looks strong.
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.