Why Qualcomm’s Stock Bulls May Be Dreaming

(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) bullish analysts may be dreaming, expecting shares of the chipmaker to rise by 25% based on average analysts price targets. But options traders are betting share of the stock fall, while an analysis of the stock chart suggests the same. (For more, see also: Qualcomm's Stock Heads to a Crossroads.)

Shares of Qualcomm are off nearly 20% from their highs in January, followed by President Trump blocking a proposed $117 billion acquisition by Broadcom Inc. (AVGO). But analysts price targets are still calling for the stock to rise to around $68.65, despite slashing earnings estimates for the current quarter, and Qualcomm's acquisition of NXP Semiconductor NV (NXPI) in jeopardy. 

QCOM data by YCharts

Bearish Options Bets

The options set to expire on May 18, are implying that shares of Qualcomm rise or fall by nearly 8% from the $55 strike price. The cost to buy one put and one call is roughly $4.35, and that places the stock in a trading range of roughly $50.60 and $59.35 by expiration. But the number of puts heavily outweighs the calls, by a ratio of nearly 6 to 1, with 18,300 open puts contracts. It suggests that options traders are betting more aggressively that shares of Qualcomm will fall by expiration. 

The bets for Qualcomm to fall below $55 have been steadily rising since March 14, when there were nearly no bets placed at all. It would suggest that traders have become increasingly more bearish on the stock. 

(Trade Alert)

Weak Technical

The technical chart also looks relatively bearish with a long-term downtrend currently in place, while the chart over the shorter-term continues to suggest shares could fall about 9.7% to roughly $50. (For more, see also: The Future of Qualcomm's Stock.)

Too Optimistic

An average analyst price target of $68.65, even after coming down from $72, remains optimistic. This also comes despite analysts cutting their estimates for the fiscal second-quarter by nearly 17% since the start of 2018 to $0.71 per share, from $0.86 per share. The company is expected to report second-quarter results on April 25, with earnings expected to decline by 47% versus last year, while revenue is forecast to fall by 13%. Even worse, earnings are forecast to drop by 20% for the full year, while revenue is seen falling about 1%. 

QCOM EPS Estimates for Current Quarter data by YCharts

The one piece of optimism that investors and analysts have turned to is the pending deal with NXP Semiconductor, as a way to expand Qualcomm's portfolio and diversify its revenue stream. But even the acquisition has questions marks, as Chinese regulators have yet to approve the deal. 

With second-quarter results around the corner, it should become clear pretty quickly if price targets need to come down. Or, conversely, if the outlook for Qualcomm is improving and the bears are wrong.

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.