Update: GOOG Q2 Preview & Thoughts, No Trade

by Dan July 19, 2012 2:51 pm • Commentary

Update July 19th, 2012 at 2:52m:  We took a hard look at GOOG and the way the options market is pricing the move and how the fundamental picture lines up, we frankly don’t see a ton to do without making a clear directional bet.   We lack the conviction on either direction.

At this point in the tech earning cycle, as bad news being sold a couple weeks back (APKT, INFA, STX) and now a shift to bad news being bought (INTC, IBM, QCOM), and GOOG’s under-performance in 2012, could signal that some of the near-term headwinds are in the stock.  If this week has shown us anything, investors are piling into quality, cheap defensive tech names where it is perceived that Q2 weakness coupled with a mildly tempered outlook could be a catalyst for second half gains.  This is not our view, and while we acknowledge that this can go on for a bit, we don’t think it is a particularly sound investment strategy in the face of what we believe will be an increasingly volatile few months in equity markets the world over.  

I took a hard look at XLK Put Spreads in AUG as a way to play a near term re-tracement in Tech shares, this etf has some fairly concentrated holdings in some of our favorite tech stocks, with 4 of the top 5 making up about 40% of the etf (AAPL ~20% of the etf, MSFT ~8%, IBM ~7.6% and GOOG ~5%).  With MSFT and GOOG both reporting tonight, XLK could be a good way to play a trend, and the options in the name are not exactly expensive.  At this point I am already long QQQ Aug Put Spreads and I don’t see a ton of sense in doubling up on this risk as I am already there and ultimately it becomes a play on AAPL’s earnings next week.

So in sum, we looked at calendars, but that requires picking a direction and we don’t want to do that, we look at buying the move as it looks cheap to what it has realized over the last 2 years, but that seems like a sucker play.  So at this point we sit on our hands…..Enis is in the process of looking at MSFT, that one looks a little more interesting as the stock has run 8% in the last week into earnings.  Stay tuned.

Original Post July 19th, 2012 at 12:51pm:

We don’t have a trade yet, but wanted to give a quick preview and some of our initial thoughts prior to GOOG’s Q2 print tonight.

Event:  GOOG ($596) reports Q2 earnings after the close tonight, the options market is implying about a 5.5% move following earnings, which is fairly shy to the average move of 7.8% over the last 4 qtrs and 7.5% over the last 8 qtrs.  These are massive moves for a stock with a market cap close to $200billion.


Price Action:  The stock has massively under-performed (-7.8%)  ytd the SPX (up 9.5%) of which it is the 15 largest weighted stock in the index.  


Valuation: The stock is cheap by most metrics, with a PE of a tad above the S&P, with expected earnings and revenue growth this year of close to 20% and high teens next year, but when u back out the more than $50billion in cash on their balance sheet, the stock has an AAPL type PE.


Sentiment: The street is overwhelmingly positive on the stock with 36 Buys, 7 Holds and No Sells, and avg 12 month price target north of $700.


Volatility:  Google implied vol seems pretty cheap considering what it normally does going into an earnings, combined with how the stock generally moves following an earnings report. Here’s the one year comparison of IV and HV:


Q2 Expectations:  GOOG does not give specific forward guidance, coupled with the fact that this will be the first qtr that they report consolidated results with their recent MMI acquisition could cause a bit of confusion after the press release as investors will be breaking out MMI and Traffic Acquisition Costs (TAC).

Street Consensus:

Q2 10.16 eps, 8.39b sales

Q3 10.86 eps, 8.99b sales

2012 43.32 eps, 35.34b sales


Potential FX Miss Possibly Off-Set by Cost Controls:  GOOG gets almost 30% of their sales from Europe, and given the weakness in the Euro in the past few months, this could serve as serious headwind as it did in the case of IBM’s results.  Some analysts have projected a potential drag on sales of 3-4% in the quarter, which may be partially off set by their hedging program.  In the past GOOG has also managed costs such as hiring and R&D in an effort to manage earnings.


Technical Set Up:  Couple charts of GOOG that I found interesting…..the first, GOOG up 2.5% today approaching a huge support level of $600, that also happens to be right below the 200 day moving average, a measure that it gaped above last OCT when it reported it’s Q3 earnings and stopped that $600 level.


[caption id="attachment_14570" align="aligncenter" width="589" caption="GOOG 1 YR chart from Bloomberg"][/caption]


I guess my biggest take-away from the chart above is that most of the gaps from the last 2 years around earnings have either started or finished in the Green shaded area btwn $550 and $600.

With the stock pressing up against resistance at $600, my sense is that we are likely to see $650 or $550 in the weeks to come.  The first move tomo following the results is likely to carry through for a bit.