Qualcomm Shares Seen Rising 9% on NXP Deal

(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) shares have suffered mightily over the past year with shares up by only 2.7%, severely underperforming the S&P 500’s rise of over 14%. Even worse, shares are nearly 19% off their highs of around $68 after the U.S. government blocked Broadcom Inc.'s (AVGO) proposed acquisition for the company. However, now, some options traders are starting to get bullish on Qualcomm and see shares rising by about 9.25% by July. 

Shares of Qualcomm have risen by about 5.5% since May 8 as trade tensions with China appear to have calmed down, opening the door for Qualcomm to finally complete its proposed acquisition of NXP Semiconductors N.V. (NXPI) for $44 billion. Qualcomm is still waiting for approval from regulators in China to complete the proposed transaction. Shares of the chipmaker rose by 2.75% on May 14 while shares of NXP rose by over 13%. 

QCOM data by YCharts

Bullish Bets

The options set to expire on July 2 saw a good deal of volume on May 14, with the $60 strike price calls seeing its open interest rise by nearly 22,000 contracts. There are now almost 28,000 open contracts at that strike price, and with the calls trading at the cost of roughly $1, the stock would need to rise to $61 just for the calls to break even, about 9.25% higher than the current stock price around $55.92. The bet is sizable at roughly $3.6 million, considering Qualcomm has so much riding on the outcome of its deal with NXP. 

A Rise Above $65

Some traders are betting shares rise even higher, with nearly 14,300 open call contracts at the $65 strike price. With those calls trading at a price around $0.35, the stock would need to rise to roughly $65.35 to break even, nearly 13.5% from its current price. However, this is a much smaller bet, with a dollar value of only $575,000. 

Weak Outlook

The outlook for Qualcomm's stock is still weak based on current analysts’ estimates. Over the past 30 days analysts have lowered their earnings outlook for 2018, by nearly 4%, and now see earnings falling by over 23%, to $3.29 per share. Meanwhile, revenue estimates have declined by almost 1%, and revenue is now forecast to fall by nearly 5.5% to $21.96 billion. 

QCOM Revenue Estimates for Current Fiscal Year data by YCharts

Options traders are betting that the odds of Qualcomm's purchasing of NXP are getting better, and that would be an immense help to Qualcomm and likely boost the company's weak business outlook. 

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.