GOOG: Report Q1 Earnings April 14, Expectaions and Ways to Play

by Dan April 7, 2011 8:27 am • Commentary

EVENT:  GOOG is set to report Q1 Earnings April 14 after the close.  The options market is currently implying about a 5% move, with the avg over the last 8 qtrs also being 5%. (quick note as for looking at the implied move, if you take the at the money straddle, the Apr 575, it is offered at 29.50, so your break-even is 29.50 higher or lower than 575, which is about 5% from spot either way.  Now this works with a week left to expiration as there is little time value left in the option of most of the extrinsic value is a result of the upcoming earnings event, so we are able to isolate the implied move without making more subjective observations about where forward vol should be).


PRICE ACTION / SENTIMENT: Stock is currently down ~3% ytd under-performing the Nasdaq which is up ~5.5% ytd.  Chart below shows GOOG’s out-performance of the index in the fall after a big earnings beat, but for most of this year it has reversed this relationship.

GOOG (white) vs

-Wall street analysts continue their love affair with GOOG with 35 buys, 8 holds and NO sells with an average 12 month price target.

MY VIEW: GOOG is not the growth company it once was as Wall Street analysts are expecting EPS and sales growth to decelerate to ~17% and 22% year over year.  Company is also in what will be an important transition away from a grown-up as CEO to one of the original founders, Larry Page.  Hmmm, this one is a real head scratcher in my opinion. For the better part of the last 10 years, Sergey and Cousin Larry have spent most of their time as billionaires on really big private jets, doing a whole host of odd things while Eric Schmidt manned the helm.

But lets move on, the real questions GOOG investors have to ask themselves is Larry Page’s return going to be more like Jerry Yang and Michael Dell’s return to YHOO and DELL respectively, or will he be able to reinvigorate a once torrid grower and add innovation that can actually help diversify the companies revenue dependence on search, like Steve Jobs returning to Apple.  I certainly don’t have the answer to that, but generally I would say the likelihood of a GOOG resurgence by a non operating guy who will try to run a company of 25,000 employees worldwide with $20 billion in revenues like a start up is highly unlikely…..the only real question in my mind is how long will it take the board to figure it out and go grab another grown up CEO.

-These questions and the magnitude of decelerating growth are likely the key reasons for the stock’s under-performance YTD, since the Page announcement.

Technically stock is sitting at a fairly important level with the current band of 550 to 600 as key support / resistance.  The chart also appears to be forming the right shoulder of a head and shoulders top with 550 as the neckline.

1 Yr GOOG CHART by Bloomberg

WAYS TO PLAY: 2 TRADES

1st TRADE If you think that earnings and the guidance that the company actually gives could serve as a catalyst for the stock and cause volatility in the name look to BUY THE MOVE as it looks priced fairly.

TRADE: GOOG (stock ref 575)  BUY THE APR 550 / 600 Strangle for~ 11.00

-Buy APR 550 Put for ~5.80 and

-Buy APr 600 Call for ~5.20

Break-Evens on APR Expiration:

Upside: btwn 600 and 611 lose up to 11, above 611 (up ~6%) you make money.

Downside: Btwn  550 and 539 lose up to 11.00, below 539 (down ~6%) you make money.

Worst Case: Stock between 550 and 600 and you lose the 11.00 premium (~2% of the underlying) that you paid for the Strangle.

TRADE RATIONALE: This sort of “vol” trade is not for everyone and understand while evaluating that this is not a high probability bet, so if you go down this road size appropriately and only bet what you are willing to lose.

2nd TRADE If you are inclined to think that GOOG with “new” leadership will be mildly cautious as the head down some new strategic directions which could place some pressure on margins and the stock could breach that key 550 support level than look to BUY Put Spreads to EXPRESS BEARISH views and define your risk.

TRADE: GOOG (stock ref ~575) BUY the APR 550  / 530 Put Spread for ~3.50
-Buy Apr 550 Put for 5.80 and
-Sell Apr 530 Put at 2.30

Break-Even on APR Expiration:
Upside: 550 or higher lose the 3.50 in premium that you paid, btwn 546.50 and 550 lose up to 3.50.
Downside: btwn 546.50 (down 5%) and 530 (down ~8%) can make up to 16.50, below 530 make all 16.50