Event: GOOG reports its Q3 earnings tomorrow night, Oct 17th, after the close. The options market is implying about a 4% one day move, which is below both the 4 qtr avg of about 4.75% and the 8 qtr avg of about 5.25%.
Sentiment: Wall Street analysts are generally positive on the stock, with 35 Buys, 13 Holds and 1 Sell, with an average 12 month price target of around $992. The stock’s short interest stands at 2% of float, a slight increase over the past year.
Options Open Interest: Open interest is evenly split between puts and calls, and recent volumes have also been about evenly split. The 900 strike calls have the most open interest across expiries among strikes close to at-the-money.
Price Action / Technicals: GOOG has been dead-money since May, after a very strong 1 year up move of more than 50%. The stock tested and held important support around $850 on last week’s move lower:[caption id="attachment_31331" align="alignnone" width="600"] GOOG daily, 50 day ma in pink, 200 day ma in black, Courtesy of Bloomberg[/caption]
GOOG’s bounce off of $850 (in red) is the 3rd such bounce since May. The stock did make a lower low on the most recent selloff, however. But yesterday’s move above the 50 day ma is one point of optimism for the short-term outlook.
For earnings, the $840 level is crucial support since the recent low and the 200 day moving average are both around there. On the upside, the September high is around $906, and the October high so far this month is $894.
Fundamentals: My Macro Wrap post in early August about Internet advertising focused on the importance of mobile and video for future advertising growth. GOOG is THE leader in online video (through Youtube), but GOOG has in fact struggled in mobile. Video is likely going to be the bigger factor in the future as it takes share from TV advertising (which is almost 50% of the global ad market).
The future looks good for Youtube. But for GOOG, the real concern is the traditional display ad market. GOOG’s problem is that its cost-per-clicks have continued to edge lower over the last year, even as the overall internet ad market has grown. The second quarter of 2013 showed a 5% year-over-year decrease in earnings as a result.
Here’s the crux for GOOG – if it can grow earnings 15-20% per year, the stock is cheap. If it grows earnings at 10% per year as it is on track to do for the second straight year, then the stock no longer looks too cheap trading at 26x times trailing earnings. GOOG is expected to see earnings growth re-accelerate to the highs teens in the next 2 years, which would place the stock at a PE/G (PE to growth) of about 1, which would be very reasonable for a company with a market cap of this size ($300 billion).
Volatility: GOOG’s tight range in the stock is reflected in its low realized volatility over the past 4 months. 30 day realized volatility (blue) has been in the teens the whole time:[caption id="attachment_31333" align="alignnone" width="600"] 30 day implied vol (red) vs. 30 day realized (blue) in GOOG, Courtesy of LiveVolPro[/caption]
Despite that low realized volatility, implied vol has moved back to near the 30 level, where it was prior to its last 3 earnings reports. Expect a move back down below 20 after earnings.
Our View: GOOG’s technical situation has the look of a tired stock, though its recent bounce from below $850 is encouraging. After last quarter’s disappointment, this quarter has added importance. Fortunately for GOOG, the year-over-year earnings comparison is much easier this quarter than last. The third quarter of 2012 was a very weak result for GOOG (the stock sold off more than 10% in the subsequent weeks).
While the bar is set low for this quarter, analyst expectations over the next year are much higher. Guidance will be crucial. Along with that, traders will be watching the general trend in the traditional display ad business, as well as any indications that alternate revenue streams are gaining steam.
Put it all together, and we have no strong directional bias, and implied volatility seems fair. We’ll have a few trade ideas tomorrow, though we might not pull the trigger ourselves.