Qualcomm Stock Looks Cheap Here - Short Put Plays for Income Work Well

Qualcomm Inc (QCOM) stock still looks cheap here based on its strong free cash flow (FCF) and FCF margins. Shorting out-of-the-money (OTM) put options has proven to be a good income play for value investors in QCOM stock.

QCOM is trading at $207.43 in morning trading on July 9. My June 3 Barchart article discussed shorting OTM puts when QCOM was trading at $205.68: “Qualcomm Stock Is Still Below Fair Value - Shorting Puts Is a Good Strategy Here.”

At the time the $200 strike price puts expiring July 5 were trading for $3.70. That provided short sellers an immediate yield of yield of 1.85% (i.e., $3.70/$200) for a month. That worked out well for these investors as QCOM closed at $205.75. That means the put play stayed out-of-the-money (OTM) and the investor had no obligation to buy shares at $200.00

This play can be repeated, especially since the stock is worth considerably more.

QCOM Stock Price Targets

For example, in my last article, I showed that QCOM was worth $283.22 per share. This is based on FCF margins and a 4.5% FCF yield valuation metric.

Here is how that works. FCF represented 33.7% of sales for the trailing 12 months (TTM) to March 24. So applying 33.7% to analysts' revenue estimates of $42.35 billion for the year ending Sept. 2025 leads to an FCF estimate of $14.27 billion.

Then, applying a 4.5% FCF yield to this estimate (which is the same as multiplying it by 22.2x) results in a forecast market cap of $317.1 billion. That is 36.7% higher than its present market cap of $232 billion.

In other words, the price target should be 36.7% higher than yesterday's close of $207.89, or $284 per share.

Analysts agree that QCOM stock is undervalued. For example, AnaChart.com, a new sell-side analyst tracking site, shows that the average price target of 26 analysts is now $226.78. That represents a potential upside of 9% over yesterday's close.

One way for existing investors to play this to gain extra income is to short out-of-the-money (OTM) puts.

Shorting OTM Puts

As mentioned earlier, QCOM put premiums are high enough for short sellers to repeatedly sell short in nearby expiry periods. For example, look at the July 26 expiration period, 17 days from now (a little over 2 weeks). 

It shows that the $202.50 strike price, which is 2.69% below today's price, has a put premium of $3.25 on the bid side. That represents a short put yield of 1.60% for just over 2 weeks (i.e., $3.25/$202.50).

QCOM puts expiring July 26 - Barchart - As of July 9, 2024

Here is how that works. Any investor seeking this income must secure $20,250 in cash or margin with their brokerage firm. Then, after receiving approval to short puts, the investor can enter an order to “Sell to Open” 1 put contract expiring July 26 at the $202.50 strike price level.

The account will then immediately receive $325 in cash. That lowers the net investment to just $19,925. So, even if the stock falls to $202.50 on or before July 26, the investor still has a small gain (i.e., $20,250/$19,925-1 = +1.63%.

Moreover, if the investor can repeat this trade four times during a quarter, the expected return (ER) is $1,300. That represents an ER yield of 6.42% (i.e., $1,300/$20,250) during the 12 weeks. That shows why this is a good way for existing shareholders in QCOM stock to make extra income.

And for those that don't already own shares in QCOM, this is a way to potentially buy into the stock at a lower price with a good potential ER. 

The bottom line is that QCOM stock looks cheap here. Shorting OTM puts is a good way to take advantage of this situation, given the relatively high premiums at which its put options are trading.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.