$GOOG Q1 Earnings Preview

by Dan April 17, 2013 12:53 pm • Commentary

Event: GOOG reports its fiscal Q1 earnings after the close tomorrow.  The options are pricing in about a 4.75% move based on the weekly straddle, relative to 5.25% avg. move over the past 4 quarters, and 7% avg. move over the past 8 quarters.

Sentiment:  Wall Street analysts are fairly bullish on the stock with 30 Buys, 15 Holds and 1 Sell, and an average 12 month price target of around $879.  Option open interest actually has more puts than calls, but ratio close to 1.  Recent option volumes indicate no bias either.

Fundamentals / Valuation:  

Positives:  Plain and simple, near monopoly on their core business which accounts for more than 75% of their sales, fortress balance sheet with 20% of their market cap in cash, trades at a PE/G of ~1 with sales expected to grow at a similar mid-teens rate for the next 2 years.  The stock while not cheap compared to most large cap tech, maybe unappreciated if they are successful in their focus to diversify away from their core desktop search, make the slightest headway in Social, push deeper into branded mobile products like Nexus, continue to scale YouTube and have any unexpected success in their 20% investments like GoogleGlass to name a few.

Negatives:  The major tenets of the bear case is that their core business is under assault from FB, Twitter, MSFT, YHOO, AAPL etc etc.   They have the share to lose in their core desktop search business and have shown little ability to make a dent in markets like China where they fiercely battled locals like BIDU.  Monetizing mobile search is far less profitable than desktop and the field is far more crowded, often dominated by the device maker of the mobile product.

IN a Quarterly preview note to clients dated April 15, 2013, Sanford Bernstein Internet analyst Carlos Kirjner, suggests there are “3 questions that matter most for long term GOOG investors in this quarter, and over the next several quarters”:

  • Is the “typical” sequential change in Y/Y Google Websites F/X-neutral revenue growth what we saw in4Q12 (an estimated 30 bps higher than 3Q12) or was the 3Q12 change (an estimated 400 bps decline versus 2Q12) the “new normal?
  • How fast are Google core gross profits (instead of revenues ex-TAC) growing?
  • Are operating expenses growing in line with revenues or with gross profits (or neither)?

Price Action / Technicals: 

Enis went through the technicals on GOOG in his Chart of the Day post from April 5th.  Here is the meat of the post:

The lifetime chart of GOOG shows the importance of the 750-775 area:

Lifetime daily chart of GOOG, Courtesy of Bloomberg

Lifetime daily chart of GOOG, Courtesy of Bloomberg

I’ve drawn the red line at the 2007 high around 750, and the stock sold off from a similar area in late 2012 after a weak earnings report.  I would expect that level to act as support in the near-term, but GOOG reports earnings on April 18th, and that could be the catalyst for a big move in either direction, technicals notwithstanding.

Zooming in to the 3 year chart, more important long-term support lies at $650:


GOOG 3 year daily, Courtesy of Bloomberg

GOOG 3 year daily, Courtesy of Bloomberg

I’m not saying that I expect the stock to sell off down to that level.  Rather, just an observation that if the stock were to get to 650 at some point this year, I would view that as a very favorable risk/reward long entry level.

In the meantime, GOOG is in a bit no-man’s land, with 750 important near-term support, and the all-time high at 844 the upside resistance, with the psychological 800 level maybe a footnote in the technical handbook for now.

Volatility:   Google IV is rising going into earnings but it’s not ridiculously high on a historical level. Here’s a look at HV30 (red) vs IV30 (blue):

Screen Shot 2013-04-17 at 8.57.24 AM
from LiveVol Pro

May regular vol should fall to 20 or below following the report.

We will offer some directional views on the print tomorrow prior to the report.