Qualcomm Inc.: Riding the Bull All the Way to the Top

The markets are trading higher, the S&P 500 touched a new record high and there has never been a better time for riding the bull. It is on the strength of this increased bullish momentum that we examine the options of Qualcomm Inc. (NASDAQ:QCOM). Qualcomm with its market capitalization of $128.09B  is engaged in design, manufacture, have manufactured on its behalf and market digital communications products and services based on code division multiple access (CDMA), Orthogonal Frequency Division Multiplexing (OFDMA) and other technologies.

Financial Update

On July 23, Qualcomm delivered Q3 2014 (opens pdf) results to show growth in the top and bottom lines. Highlights of the third quarter results are presented below:

  • Revenues: $6.81 billion, up 9 percent year-over-year (y-o-y) and 7 percent sequentially
  • Operating income: $2.08 billion, up 24 percent y-o-y and 4 percent sequentially
  • Net income: $2.24 billion, up 42 percent y-o-y and 14 percent sequentially
  • Diluted earnings per share: $1.31, up 46 percent y-o-y and 15 percent sequentially
  • Operating cash flow: $2.67 billion, up 29 percent y-o-y; 39 percent of revenues
  • Return of capital to stockholders: $2.06 billion, including $1.35 billion through repurchases of 17.0 million shares of common stock and $706 million, or $0.42 per share, of cash dividends paid.

I am more impressed with Qualcomm’s raising of its FY 2014 earnings per share guidance as it expects its semiconductor business to deliver an outperformance.

Rising as the Market Rises

QCOM Chart

The stock chart above shows how shares of Qualcomm have traded since it delivered third quarter earnings on July 23. You will observe that the shares of Qualcomm suffered a selloff as the general market plunged at the onset of increased geopolitical concerns in Ukraine, Iraq and Israel. However, the S&P 500 has been climbing up steadily since August 8 and shares of Qualcomm have started bouncing higher.

The fact that shares of Qualcomm are now rising as the market rises is of tremendous importance to options traders because geopolitical concerns did not allow the stock to rise after it delivered impressive third quarter results. However, the pent-up bullishness in shares of Qualcomm is starting to emerge and the stock’s RSI index 56.16 suggests more bullish activity on the horizon.

Huge War Chest of Patents

Qualcomm owns more than 250 royalty-bearing licenses and patents globally, it boasts of more than 90 single-mode OFDMA licenses, and its next-generation processors (Snapdragon 600, 800) are making waves in the market. This huge library of patents means that Qualcomm invariably generates revenue from the sale of practically every smartphone on the planet.

You will also remember that in January, Qualcomm acquired a portfolio of patents from Hewlett-Packard (HPQ) at an undisclosed price. It was reported that the portfolio contained some 1,400 granted and pending patent applications in the United States and close to 1,000 granted and pending patents in Europe and Asia.

It is hard to envisage a change or disruption to Qualcomm’s ability to continue generating revenue from its licenses in the short and long terms; hence, staying on the bullish track with this company is a no-brainer.

How to Trade QCOM Options

I am long QCOM and I have an $85 price target on Qualcomm in the next six months. I recommend buying the QCOM Jan 2015 80.000 call (QCOM150117C00080000) at an asking price of $1.80.

— Daily Option Alerts

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