New Trade GOOG: Google Calendar

by Dan April 11, 2012 2:42 pm • Commentary

GOOG ($634.20 ) reports Q1 earnings on Thursday April 12th after the close.  The options market is implying a 6.5%* move vs the avg over the last 8 quarters of about 8%.  There are very few Mega-CAap stocks in the S&P 100 that have moved this much on earnings over the last 2 years.  For instance MSFT which has a $254 bill market cap vs GOOG’s $205bill market cap has only moved about 2.25% on avg for the last 8 qtrs, and IBM with a $235Billion market cap has moved about 3.2% on avg for the last 8qtrs.  You get the point, it tends to move a lot on earnings.

* with the stock about 634.20 I took the Apr13th weekly straddle offered at about $42 and divided that by the stock price to get about 6.5% move you would need in either direction to break-even on Friday’s expiration. 

The stock has massively under-performed most of it’s large cap peers ytd down almost 2% ytd, vs the Nasdaq up about 16%.  There appears to be a huge disconnect btwn Wall Street Analyst expectations and that of investors who have placed a discount on the shares relative to other large cap tech peers. Wall street analysts are overwhelmingly positive on the name with 35 Buys, 8 Holds and NO Sells with an avg 12 month price target of almost 14% higher than current levels. The stock trades at a little less than 15x 2012 earnings estimates that are expected to grow 19%…..WTF.   When you ask analysts for the bear story near term you hear a lot about the overhang of GOOG’s attempt to purchase Motorola Mobility for $12.5b (this is actually much less when you exclude their $billion in cash).  So the point here is that investors ain’t really buying the GOOG story in a year that is unfolding  as a bit more of a “stock pickers market”.

See Citi analyst Mark Mahaney’s (rates GOOG a Buy with a $750 target) comments heading into the print below.

Volatility and Skew:

Like we’ve seen alot recently in names entering an event like earnings, the weekly options in Google are so pumped compared to the second month out (May) it’s starting to make us think the traders that only trade weeklies are starting to distort calendar values. It’s getting so weird that we’re half expecting to see someone mess up and offer calendars for credits in one of these things. Currently, the April13 weeklies ATM are about a 96 vol, the May ATM options are about 32 vol. See here (Apr weeklies in red, May regulars in green)

There’s also a weird bulge in the Vol of ATM options compared to the lines to the upside and downside in both the weeklies and April regulars. This is also a bit strange and disconnected. Normally that curve would be fairly consistent like you see in the May and out months. All of this could just be that the market makers on are on the receiving end of alot of edge from retail paper, and are just pocketing these discrepancies. That’s probably true, and we want to look to structures that’s on the market makers’ side.

Historical Vol:

In any calendar structure going into an event you want to look to the month you would be buying (in this case May) and try to estimate how much that month’s vol will come in post event. In the case of May, currently at 32, it’s probably about 25-30% given the lows in the low 20’s GOOG has seen following earnings events (red line on chart):


MY VIEW: I don’t have strong conviction on direction here as I feel given historical performance if the stock disappoints it is likely to trade at least inline with the implied move to the downside, and if it beats what appears to be muted expectations the stock could trade back up to the 52 week high made in Jan of approximately $670, up about 5.5% from here.

MY TRADE: GOOG ($634.20) Buy the Apr13th weekly 675 / May 675 Call Calendar for ~6.00

-Sell 1 GOOG Apr13th weekly 675 Call at 5.00

-Buy 1 GOOG May 675 Call for 11.00

Break-Even on Apr13th weekly expiration:

If the stock is 675 or lower you essentially own the May 675 Call for 6.00, Your Max Loss is 6.00 premium that you paid for the spread and if there is a spike higher you will make the difference btwn the 2 options and will look to close out the spread prior to expiration.


Citi Preview Note to clients April 10th, 2012:

Google To Report Q1 Results On Thursday, April 12th, After The Close – We are
looking for $8.16B in Net Revenue (up 25% Y/Y and flat Q/Q) and $9.63 in Non-GAAP
EPS. This compares with consensus expectations of $8.13B and $9.64. Based on
extensive intra-quarter channel checks and our model sensitivity work, we believe
Street Q1 Revenue & Non-GAAP EPS estimates are reasonable.

 Our GOOG Fundamentals Call For Q1 Is Neutralish – We anticipate organic Y/Y
Gross Revenue growth at 25%, generally in-line with Q4’s Y/Y growth rate. And we
anticipate GOOG’s EBITDA margin to be down around 134 bps Y/Y to 54.2%. We
expect deleverage to continue to come from the COGS, R&D, and Sales & Marketing
lines. We note that in Q1, expenses generally tick up due to bonuses, 401K matching
efforts, and other payroll-related expenses.

 Should All Eyez Be On the CPC Prize? — We believe investors will be heavily
focused on CPCs, which declined 8% Y/Y in Q4 — the first decline since the ‘08
Recession — due to improved Ads Quality changes and the Mobile Monetization
transition. We expect Q1 CPCs to be down a similar level. But we don’t view the
drivers as negative structural factors. And we believe total Search spend (which also
incorporates Paid Clicks) a much better measure.

 Reiterate Buy And $750 PT – As we noted in our March 27th Updating The Long
Thesis Report, we believe that our outlook for a 3-year high-teens+ EPS CAGR
supports a market premium multiple. As does the company’s successful positioning
against three of the biggest current trends on the Internet (Mobile, The Migration Of TV
Ad Budgets Online, and Cloud Computing). We believe some of the overhangs, like the
MMI acquisition and Social Media competition are becoming less headlinish, and
investors can start to focus on the core and emerging businesses at Google.