Should You Take a Chance With Qualcomm?

With shares of Qualcomm (NASDAQ:QCOM) trading around $76, is QCOM an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Qualcomm is engaged in the design and manufacturing of digital communications products and services. The company operates in four segments: Qualcomm CDMA technologies, Qualcomm technology licensing, Qualcomm wireless and Internet, and Qualcomm strategic initiatives. It develops and supplies integrated circuits and system software based on CDMA, OFDMA, and other technologies for uses in voice and data communications, networking, application processing, multimedia, and global positioning system products.

Qualcomm on Wednesday announced results for the third quarter of fiscal 2014 ended June 29. “We are pleased to report another record quarter with revenues, earnings per share, and chip shipments reaching all-time highs, driven by broad-based demand for our industry-leading 3G/4G chipset solutions,” said Steve Mollenkopf, CEO. “Looking forward, although we have lowered our near-term financial outlook for the licensing business, we are pleased to be raising our fiscal year earnings per share guidance on better than expected performance in our semiconductor business.”

T = Technicals on the Stock Chart Are Weak

Qualcomm stock has failed to make positive progress in recent times. The stock is currently pulling back and may need time to stabilize. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Qualcomm is trading between its rising key averages, which signals neutral price action in the near-term.

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Qualcomm options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Qualcomm options

16.35%

10%

8%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Average

Average

September Options

Average

Average

As of Thursday, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Qualcomm’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Qualcomm look like and more importantly, how did the markets like these numbers?

2014 Q2

2014 Q1

2013 Q4

2013 Q3

Earnings Growth (Y-O-Y)

45.56%

7.55%

0%

18.63%

Revenue Growth (Y-O-Y)

9.02%

3.97%

10.04%

33.08%

Earnings Reaction

-6.79%*

-3.51%

3%

-3.79%

*As of this writing

Qualcomm has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about Qualcomm’s recent earnings

P = Excellent Relative Performance Versus Peers and Sector

How has Qualcomm stock done relative to its peers – Broadcom (NASDAQ:BRCM), Nokia (NYSE:NOK), and Texas Instruments (NASDAQ:TXN) — and sector?

Qualcomm

Broadcom

Nokia

Texas Instruments

Sector

Year-to-Date Return

9.9%

28.69%

-5.29%

9.75%

5.78%

Qualcomm has been a relative performance leader, year-to-date.

Conclusion

Qualcomm provides digital communications products to a variety of consumers and companies worldwide. The stock has failed to make positive progress in recent times and is currently pulling back. Over the last four quarters, earnings and revenues have been increasing. However, investors have had mixed feelings about recent earnings announcements. Relative to its peers and sector, Qualcomm has been a relative year-to-date performance leader. Look for Qualcomm to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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