Qualcomm's Stock May Rise 8% on Improving Profits

(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 is up 3% so far in 2018, trailing the S&P 500 rise of 7%. At least some options traders are betting Qualcomm will rise by as much as 8% by the middle of October.

Shares of the chipmaker have been rising since the end of April, jumping by 30% from their lows. Analysts are now turning bullish on the stock, increasing their profit forecasts. Also, Qualcomm said it would buy back $30 billion worth of stock after canceling its deal to buy NXP Semiconductors N.V. (NXPI). (For related reading, see also: Qualcomm Stock May Fall 15% Amid Slashed Estimates.)

QCOM data by YCharts

Bullish Options Bets

As a result, some options traders are betting Qualcomm will continue to rise. The $70 calls expiring on October 19, have seen their open interest level increase by eight times, to approximately 16,000 contracts over the past month. For a buyer of those calls to earn a profit, the stock would need to climb above $71 by options expiration. That would be an increase of almost 8% from the stock’s current price of approximately $66.

Additionally, open interest for the $65 calls has increased threefold to roughly 35,000 contracts, since the end of July. Now, the number of calls outweigh the puts by a ratio of more than 5 to 1, indicating more traders are betting shares rise than fall. The long straddle—buying both a put and call—suggests that traders are anticipating the stock rises or falls by about 8%. It places the stock in a range of $60 to $71 by the middle of October.

Improving Earnings

Analysts have been raising their earnings estimates for the company over the past few weeks. Now earnings estimates are forecast to fall by approximately 15% in 2018 to $3.63 per share, from prior views of $3.29. Estimates for 2019 have improved as well, now forecasting earnings to climb by more than 21% from previous estimates of 16%. (For more, see also: Qualcomm Options Traders Looking for 13% Decline.)

QCOM EPS Estimates for Next Fiscal Year data by YCharts

Revenue Not as Stellar

The revenue outlook is forecast to improve as well, with revenue now expected to decline by 3% to $22.4 billion, from previous estimates of $21.9 billion. But revenue estimates for 2019 get worse, rising to only $22.5 billion from prior forecasts of $22.6 billion.

QCOM Revenue Estimates for Current Fiscal Year data by YCharts

At least some traders are betting that the recent rise in Qualcomm's stock is due to continue for a while longer. Those expectations seem tied to the improving fundamentals. But for shares to continue to rise over the longer term, the company is going to need to keep proving it can deliver better results.

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.