Semiconductor manufacturer Qualcomm (QCOM) has fallen far in the past year. With increased competition from upstart Chinese manufactures, heating problems with the company’s newest Snapdragon line, and Samsung moving chip production in house, Qualcomm has gone from the top of the heap to contemplating a breakup in the past 12-month period.
QCOM’s stock price has also taken a serious hit during this period, dropping more than 17%.
Qualcomm is slated to step into the earnings confessional after the close tomorrow night, and in a move to alleviate some of the pressures on its bottom line (and some pressure from activists), the company is expected to announce the layoffs of thousands of employees, expected to be more than 10% of its workforce.
With layoffs and massive restructuring as a potential backdrop, Wall Street is forecasting a fiscal third-quarter profit of 95 cents for Qualcomm — a figure that is down 34% from year-ago levels. Revenue is expected to drop 14% to $5.85 billion.
Checking in with the analyst community, we find that sentiment is fading fast on QCOM. For instance, EarningsWhisper.com reports that Qualcomm’s third-quarter whisper number arrives at 93 cents per share — 2 cents less than the consensus.
That said, there is plenty of room for additional bearish sentiment.
Specifically, Thomson/First Call reports that QCOM still maintains 21 “buy” ratings, compared to 13 “holds” and just three “sells.” Any downgrades following tomorrow’s quarterly report could weigh heavily on QCOM stock. Additionally, the 12-month price target of $75 could also see a haircut or two on a poor report.
Turning to the options pits, speculative traders appear much more optimistic when it comes to QCOM. In fact, the July/August put/call open interest ratio for QCOM stock currently rests at 0.51, with calls nearly doubling puts among near-term options. That said, this ratio rises significantly to 0.72 when we zero in on just the weekly July 24 series of options.
Click to Enlarge With the potential for volatility rising significantly heading into tomorrow’s quarterly report, it seems unusual for weekly July 24 series implieds to be pricing in a potential move of only about 5.4% for QCOM stock. In fact, current historical implieds are ranging closer to the 14% range. According to current implieds, the upper bound lies at $69.03, while the lower bound lies at $61.97.
2 Trades for QCOM Stock
Straddle: Looking at QCOM’s options data, there appears to be a rather significant discrepancy between current and historical implied volatilities. In other words, QCOM stock has the potential to move by a much greater factor than options traders are currently pricing in.
One way to take advantage of this situation is to enter a straddle. A straddle involves the simultaneous purchase of an at-the-money call and an at-the-money put, and allows the trader to take advantage of a large move in the underlying stock regardless of the direction.
At last check, the QCOM weekly July 24 series $65 straddle was offered at $2.94, or $294 per pair of contracts. Breakeven for this trade lies at $67.94 on the upside and at $62.06 on the downside.
Puts Spread: On the other hand, there are some considerable short-term risks facing QCOM stock, not the least of which the stock’s declining 50-day moving average. Additionally, if QCOM fails to reassure investors with tomorrow’s report, QCOM stock could be in for heavy short-term losses.
Traders looking to bet against QCOM might want to consider a July 24 $65/$64 bear put spread. At last check, this spread was offered at 42 cents, or $42 per pair of contracts. Breakeven lies at $64.58, while a maximum profit of 58 cents, or $58 per pair of contracts, is possible if QCOM closes at or below $64 when July options expire at the end of this week.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
