Will a New Deal Help Qualcomm Stock?

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With shares of Qualcomm (NASDAQ:QCOM) trading around $67, 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 manufacture 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. The mobile industry has been hot in recent years and looks to continue as countries worldwide keep developing and demanding these products. As an increasing number of consumers and companies engage at rising rates with their mobile devices, look for Qualcomm to be a leading provider of these essential products.

The world’s largest mobile phone carrier, China Mobile (NYSE:CHL), may be getting closer to landing a deal with Apple (NASDAQ:AAPL). Apple needs to make up for lost market share in China, but has been reluctant to redesign the iPhone to work on China Mobile’s 3G network. A new chip made by Qualcomm that allows the iPhone to work on both 3G and 4G networks along with the rumored iPhone 5C, created specifically for emerging markets, have led some to speculate that a deal with China Mobile could happen soon.

T = Technicals on the Stock Chart Are Strong

Qualcomm stock has been trending higher in the last few years. The stock is currently digesting gains from a recent bullish run. 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 signals neutral to bullish price action in the near term.

QCOM

Source: Thinkorswim

Taking a look at the implied volatility 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

20.98%

43%

41%

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

Put IV Skew

Call IV Skew

September Options

Flat

Average

October Options

Flat

Average

As of Thursday, 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 significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

30.43%

-17.19%

34.57%

18.57%

Revenue Growth (Y-O-Y)

34.95%

23.89%

28.56%

18.29%

Earnings Reaction

3.30%

-5.39%

3.91%

4.38%

Qualcomm has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Qualcomm’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

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

Qualcomm

Broadcom

Nokia

Texas Instruments

Sector

Year-to-Date Return

8.21%

-21.60%

3.54%

25.11%

5.83%

Qualcomm has been an average relative performer, year to date.

Conclusion

Qualcomm provides digital communications products to a variety of consumers and companies worldwide that are used in many industries, including the expanding mobile industry. The company may be set to provide mobile chips to iPhones specially produced for the world’s largest carrier, China Mobile. The stock has been trending higher in recent years but is currently consolidating. Over the last four quarters, earnings and revenue figures have been increasing, which has pleased investors in the company. Relative to its peers and sector, Qualcomm has been an average year-to-date performer. WAIT AND SEE what Qualcomm does this coming quarter.

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