(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of NXPI.)
Qualcomm Inc.'s (QCOM ) stock has fallen by nearly 9% thus far in 2018—but worse, shares remain over 15% off their January highs. Options traders are betting shares of Qualcomm will fall by about 16% by the middle of October as the odds increase that the company is unable to close its deal for NXP Semiconductors N.V. (NXPI), while the business outlook for the company appears bleak.
The company is expected to report results today after the close of trading. July 25 is also the date investors will learn the fate of Qualcomm's proposed $44 billion acquisition of NXP. Analysts are looking for Qualcomm's earnings to drop by nearly 15%, while revenue is expected to decline by over 2%.
Options traders are betting that the company's business outlook not only gets worse but that that the NXP deal will crumble and not save Qualcomm. The $50 puts set to expire Oct. 20 have seen an increasing level of activity with the open interest rising to about 18,000 open contracts. With the options trading at $0.75 per contract, a buyer of the puts would need the stock to fall by about 16% to $49.25 to break even from its current price of $58.50, if the options are held until expiration.
Should the regulators in China fail to approve Qualcomm's proposed acquisition of NXP, then Qualcomm will be left to go on its own. Analysts are looking for Qualcomm's earnings to decline by 23% in fiscal 2018, to $3.29 from $4.28 in 2017. The outlook for the business appears to improve in 2019 as analysts see earnings rising by 16% to $3.81, and another 9% in fiscal 2020 to $4.16 per share, but still failing to get back to 2017 levels. The company has often spoken of doing a share repurchase should the NXP deal fail, helping to boost earnings per share.
The revenue outlook for the company may better reflect just how bleak things could get for Qualcomm should the NXP deal collapse. With revenue seen dropping by over 5.5% in 2018. The bad news is that the company is expected to grow revenue by just 3% in 2019 and remain flat in 2020. Income has fallen sharply for Qualcomm over the past few years.
Without the completion of NXP, Qualcomm appears it will be hard pressed to find organic growth to push shares higher over the coming years. It seems traders are betting the market turns sour on Qualcomm in the coming months, as reality gets priced into shares.
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.