Being a supplier for Apple’s (AAPL) massively popular products like the iPhone, iPad or its line of computers can certainly be a blessing for a company’s bottom line.
But at the same time, it can be a curse.
When there’s a slip or perceived decline in the pipeline of sales (as many are now fearing is occurring at Apple), being a supplier can weigh heavily on chip stocks — as some semiconductor companies are currently learning.
Let’s take a look at three Apple suppliers and see how this relationship is impacting their company’s own fortunes — both on and off the charts — and take a quick look at option strategies that might fit in well with these chip stocks’ situations.
Apple-Tied Chip Stocks: NXP Semiconductor (NXPI)
Since reporting its top-line beat and issuing mixed guidance, shares of NXPI have climbed higher from a developing corrective bottom and into a potential fresh weekly base.
This writer recently discussed NXPI stock favorably in front of its earnings report due to its promising technical low and the company also being involved in the “Internet of Things,” or IoT, and an alternative growth driver for its shareholders in the coming years.
Regarding a strategy for positioning, I’d look for NXPI stock to close above $99.36. By waiting for a bit of technical strength, shares of NXPI would be above the 50-day simple moving average and would be signalling a fresh closing high since reporting its results.
Pricing in NXPI stock’s options are currently on the affordable side, but I’d suggest a more conservative bull vertical such as the Oct $100/$110 than an outright purchase. The spread is trading for $3 right now. Using the described technical confirmation, a trader could look to pay up to $3.60, then use a 50% money stop for additional risk management.
Apple-Tied Chip Stocks: Qorvo (QRVO)
Qorvo also reduced its revenue range to $690 million to $710 million and about 4% shy of analysts’ $727.7 estimate. The reduced outlook pays no mind to sequential sales growth of 4% and a year-over-year increase of 93%, which by the looks of it, has been discounted by investors in QRVO stock as well.
Despite the earnings fallout, many on the Street are still optimistic on QRVO stock. More than a few investment houses see the disappointing guidance as result of “weaker-than-anticipated wireless infrastructure sales and an overflow in Chinese smartphone inventory in Q1” that should prove temporary and given the selloff, now substantially larger — as a buying opportunity.
With QRVO stock off by about 30% since its report and 40%-plus from its June highs, shares could be viewed favorably as a bounce candidate and perhaps a longer-term value play if analysts are right. Checking QRVO’s options board, a below-market, Aug $50/$45 bull put spread for a credit of 80 cents or better looks attractive.
Given the magnitude of the selloff and the fact that QRVO stock is trading above $52, this limited-risk spread gives the trader a cushion of about 6% at expiration to breakeven. And as long as shares don’t break more than 4% and maintain the $50 level in the next two weeks; the trader is in position to collect the full credit.
Apple-Tied Chip Stocks: Cirrus Logic (CRUS)
In late July, the audio and voice solutions specialist announced profits that topped Street forecasts, delivered better-than-expected sales growth of 85% and issued upside revenue guidance of $290 million to $310 million compared to estimates of $275 million.
After launching higher on the heels of the report, CRUS stock has given back all those gains. Technically, CRUS has found its footing at the key long-term 200-day SMA — unlike AAPL, which recently lost support of the average.
Despite its substantial ties to Apple, some of CRUS stock’s technical strength is likely aided by CEO Jason Rhode, who was very upbeat about Fiscal 2016 and 2017. Following the company’s earnings Cirrus’ CEO stated the company should see significant growth in revenues driven by new products.
The anticipated increased business should be a diversifier beyond Apple. Cirrus Logic’s 2014 strategic purchase of Wolfson is helping with “traction across the Android platform,” according to a bullish analyst report from Stifel which saw the company raise shares of CRUS from a “hold” to a “buy” with a price target of $45.
Given Cirrus’ ripe position for picking up shares off the 200-day SMA after correcting by a not-too-bitter 26%, the Dec $34 calls for $1.40 or better are an attractive blend of risk-to-reward.
I’d attach a 50% money stop should the technical story weaken. But if CRUS stock begins to rise, the longer-term play will deliver nice profit potential with plenty of time to capitalize on a move and only moderate volatility risk given CRUS stock’s price movement history.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
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