Is Qualcomm a Good Portfolio Play?

With shares of Qualcomm (NASDAQ:QCOM) trading around $75, 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 is facing trouble in China. China’s National Development and Reform Commission (NDRC), an antitrust regulator in the country, said Wednesday that Qualcomm is under investigation for possible overcharging and using its position of “dominance” in the marketplace to limit competition. Reuters reported earlier on the news. That China has been investigating Qualcomm has been known for months, but until this point, the agency has kept its allegations close to the vest. In November, Qualcomm said that it planned to fully cooperate with government authorities.

According to Reuters, NDRC said on Wednesday that it received complaints from Qualcomm competitors who said that the company was charging too much for its patent licensing. China is also investigating whether Qualcomm is charging more for its products in China than in other markets. The NDRC confirmed that it raided Qualcomm offices in Beijing and Shanghai in November. The agency has interviewed some of the company’s top executives. If the NDRC decides that Qualcomm was in violation of any laws — a step it has yet to take — the watchdog has the right to hit the company with up to $1 billion in fines. Qualcomm has said publicly that it has been cooperating with the investigation and plans to continue to do so.

T = Technicals on the Stock Chart Are Strong

Qualcomm stock has been trending higher over the last few quarters. However, the stock is currently pulling back and may need time to consolidate before heading higher. 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 above its rising key averages which signal neutral to bullish price action in the near-term.

QCOM

(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

17.13%

16%

14%

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

March Options

Flat

Average

April Options

Flat

Average

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

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

0.00%

18.63%

30.43%

-17.19%

Revenue Growth (Y-O-Y)

10.04%

33.08%

34.95%

23.89%

Earnings Reaction

3.00%

-3.79%

3.30%

-5.39%

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 announcements.

P = Excellent Relative Performance Versus Peers and Sector

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

Qualcomm

Broadcom

Nokia

Texas Instruments

Sector

Year-to-Date Return

1.68%

4.13%

-10.50%

-0.02%

-2.17%

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 company is under investigation for possible overcharging and using its position of “dominance” in the marketplace to limit competition. The stock has been trending higher, but 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.

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