GOOG Q3 Preview

by Dan October 18, 2012 11:09 am • Commentary

Event:  GOOG reports Q3 earnings tonight after the close.  The options market is implying about a 5.5% move, vs the trailing 4 qtr avg move of ~5.2% and the 8 qtr avg of ~7%.  

Price Action:  GOOG is up about 17% ytd, slightly under-performing the Nasdaq composite with is up about 19%, but trading only 1.5% below a new all time high made earlier in the month and up almost 36% from the 2012 lows made in June.

Technicals:  Looking at the long term and 1 year charts, there is no other conclusion than the stock is extended.  From the 2008 low, the stock has held the massive uptrend making a series of higher highs and higher lows culminating in the bullish wedge that the stock broke out from this year.

[caption id="attachment_18183" align="aligncenter" width="490" caption="GOOG 5 yr chart from Bloomberg"][/caption]


On a One year basis, the break-out above 650 and its quick ascent to new highs above 750 is fairly epic. And to be honest, while it’s a tad extended on a short term basis, the consolidation it is forming around 750 is fairly impressive when you consider how the momentum has broken in other high-flying tech stocks like AAPL.  But the 4 month rally may be slightly ahead of itself, and the recent break below the recent uptrend could signal the potential for a re-tracement back to the $700 level, which could then serve as decent near term support.

[caption id="attachment_18184" align="aligncenter" width="490" caption="GOOG 1 Yr Chart from Bloomberg"][/caption]


Sentiment:  Wall Street analysts are overwhelmingly bullish on the stock with 36 Buys, only 8 Holds and No Sells, with an avg 23 month price target of about $811, or about 7% higher than current levels. Short interest sits a little below 2% of the float.

Fundamentals/Valuation:  Since July 19th, when GOOG reported Q2 earnings and revenues that were essentially inline with expectations, the stock has risen about 26% (vs the SPX up 6% and Nasdaq up ~2.5%).  The company demonstrated decent sequential revenue growth at a time where investors and the street were squarely focused on the issue of monetizing mobile search with had become a focus in the FB story.  While sales are expected to decelerate YoY to 17 and 16% over the next 2 years, that is still enviable growth for a company with ~$42 billion in expected sales in 2012.

The balance sheet is rock solid with almost 18% of their market cap in cash, and ~15.5% net of debt.  With a PE to Growth of less than one, GOOG is by no means and expensive stock.

Volatility: With just a day between earnings and expiration, October vol is more than 3 times as high as November at 98 and 29 respectively. That 98 vol in Oct generates about a 37 dollar atm straddle. The Nov vol will go down to the low 20’s following earnings, so expect a 25% or so reduction in premium on those options. Here’s how the IV looks over the last 2 years (in red):

[caption id="attachment_18189" align="aligncenter" width="598" caption="IV vs HV from Livevol Pro"][/caption]


My View:  The company does not really give forward guidance, so the stock is likely to trade on the merits of the quarter and the tone of the call.  GOOG often trades post earnings on perceived trends in operating expenses as it relates to r&d, hiring etc, the company has done a good job of managing this over the last couple quarters as TAC or Traffic Acquisition Costs have increased.  The company has a lot of levers to pull on the expense management side, and with the stock at or near all time highs, a dramatic change to the margin picture could cause volatility in the stock.

As stated above, the move appears to be a tad cheap, but it would take a significant beat and very upbeat commentary to see the stock dramatically outperform the move on the upside, and per IBM’s reaction to their results yesterday and today, It prob wont take much from all time highs to re-trace a good portion of the recent move.

Earlier in the week on GOOG’s move back to 734, I got bailed out of a bearish bet in GOOG (below) from late Sept and took it off.  We are evaluating different trades and will post if we arrive at one where we have high conviction on.


Trade Update Oct. 15th, 2012:  Since initiating a bearish Put Fly for Oct expiration on Sept 21st, GOOG rallied almost 5.5% to make a new all time high on Oct 5th, the very day that the SPX made new 4 year highs.  GOOG, and the SPX have since retreated, while the SPX has given back almost 3% in the last 3 weeks, GOOG has retreated almost all of the 5.5% gains in the same period.

20 day GOOG chart

For the first time in weeks, GOOG is starting to show some relative weakness.  But at this point I am starting to feel like Christmas came early on this trade as it was immediately against me, and I was wrong out of the gate, so prudence is warranted in my humble opinion.   I am now going to take a small profit, close the position and look for a better re-entry point as I take a closer look at their Q3 earnings report due Oct 18th after the close.

Action: GOOG ($734) Sold to Close Oct 715/680/645 Put Fly at 6.00 for a 1.00 gain.

** The screens are wide as this is a multi-legged trade, I used a near mid market limit and got filled, NEVER USE MARKET ORDERS IN MULTI-LEG TRADES LIKE FLYS.




Original Post Sept 21st, 2012: New Trade GOOG: AAPL’s New iOS Leaves GOOG Searching for Answers in Mobile  

Here is a preview of the trade that I will be discussing tonight on Options Action on CNBC at 5pm:

GOOG has very quietly, without a whole heck of a lot of news made new 52 week highs, quickly approaching the all time closing of $741.79 from back in Nov 2007.   The stock has had a monster run of late, up 30% since early June and now up 13.75% ytd, but still under-performing the SPX up about 16.6% and the Nasdaq up 22.6%.

When compared to its arch rival AAPL, GOOG as a stock is treated like a red-headed step child when you consider the company’s rock solid balance sheet (18% of market cap in cash), expected earnings growth at about 17% for the next 2 years, and very reasonable valuation,  12x ex-cash, which is basically inline with AAPL for 2013.

Here is the thing, GOOG more than AAPL, or even FB appears to be the one playing catch up in many areas of Mobile search.  Make no mistake about it, AAPL and FB are likely to get cosier as the IOS / Android wars heat up.  Obviously GOOG has enjoyed the very poor reviews of AAPL’s new Maps App in the iOS for the new iPhone and iPad which in some ways softens the blows of it getting booted off the platform, but AAPL will win this battle and now emboldened by their recent patent victory over Samsung they are very likely to turn their sights squarely on Android.   In late August there were media reports that both AAPL and GOOG CEOs held high level patent discussions to avoid costly litigation (read here), my sense this was a bit of a trial balloon and will likely get much worse before it gets better.

I guess a major argument of the GOOG bear thesis is that with GOOG maps out of iOS devices, GOOG’s costs associated with accessing iOS search queries will go up massively and given AAPL’s increasingly dominant position in Tablets and as evidenced by AAPL’s iPhone 5 launch today, this may be the start of a massive headwind for GOOG in mobile search.

Near term I think GOOG has run too far too fast and want to look for a low premium way to get some short exposure to GOOG in Oct in front of what could be an important Q3 earnings report that should fall in Oct expiration.


TRADE: GOOG ($734.50) Bought Oct 715/680/645 Put Butterfly for 5.00

-Bought 1 Oct 715 Put for 14.4

-Sold 2 Oct 680 Puts for a total of 11.40 (5.70 each)

-Bought 1 Oct 645 Put for 2.00

Break-Even on Oct Expiration:

-Profits btwn 710 and 680, make up to 30.00, max gain of 30.00 at 680, profit trails off btwn 680 and 650.

-Losses of up to 5.00 btwn 710 and 715 and btwn 650 and 645, max loss of 5.00 above 715 and below 645


TRADE RATIONALE:  With the stock up here, we are likely to see it at least make new highs in the days/weeks to come, I am going to leg into this one, a bit, and put on about a half position, I don’t see the stock running away prior to earnings, but I like the risk/reward of leaning on the 680 level which was the last spot at which it based prior to the recent run.

Oct options are already implying about a 5% move vs the 4 qtr avg of about 5.75%.

The strikes that I chose are to take advantage of the range that the stock has traded in since breaking out at $650 back in mid August.  I can make up to 30.00 btwn 710 and 650.

GOOG ytd chart from Bloomberg

Also, BID/ASK is very wide, I put my 5.00 bid in which was mid market and got hit. I never pay full bid ask in multi-leg structures like this.