(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NXPI.)
Options traders are betting Qualcomm Inc.'s (QCOM) recent declines aren't over and that shares will fall nearly 13% from its current price (roughly $54.80) by June. The outlook for the company is pretty grim, with analysts looking for the company to post less-than-stellar fiscal second-quarter 2018 results April 19. Another headwind facing shares of Qualcomm has been its inability to close the pending acquisition of NXP Semiconductor NV (NXPI) as the deal awaits approval from Chinese regulators.
Qualcomm shares are already down by about 14.5% in 2018 after President Donald Trump blocked Broadcom Ltd.'s (AVGO) proposed acquisition of Qualcomm. With the Broadcom bid gone, the acquisition of NXP in limbo, the stock is left to perform on the merits of earnings and revenue. But analysts are expecting the second quarter to be horrible, with earnings forecast to decline 48% from a year ago, while revenue is expected to drop by almost 13%, according to Ycharts.
Bearish Option Bets
The bearish options bet in Qualcomm can be found at the $50 strike price set to expire June 15. There is currently an open interest of nearly 31,000 contracts, and with the options trading around $2 per contract, the position has a value of about $6.2 million. For the bet to be profitable, the stock would need to fall below $48, a decline of 12.5% from its current price.
The long straddle options strategy is looking for a period of heightening volatility as well, based on the June $52.5 strike price, implying a rise or fall of about 14.6%, putting the stock in a range of approximately $45 to $60. Additionally, the puts heavily outweigh the calls, with nearly 8,300 open put contracts, with only 1,500 open call contracts. A sign that traders are also betting more heavily for the stock to drop.
The bearish outlook in the options market stems not only from the weak earnings outlook for the quarter but also the whole year. Analysts are looking for earnings to fall by nearly 21% in 2018, while revenue is expected to drop by almost 4.75%. In fact, only 50% of the 24 analysts that cover the stock have a buy or outperform rating on the stock, while 50% have a hold or sell rating, according to Ycharts—not a strong endorsement for the stock.
It seems that options traders betting shares of Qualcomm continue to fall in 2018 have good reasons to think so. With question marks in place around the pending acquisitions and a weak earnings outlook, it seems like a bet some traders are willing to make.
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.