$GOOG Q4 Earnings Preview

by Enis January 30, 2014 10:33 am • Commentary

Event:  GOOG reports its Q4 earnings today after the close.  The options market is implying about a 6% one day move, which is essentially in line with the 4 quarter average of 6.35%, and the 8 quarter average of about 6.15%.

Sentiment:  Wall Street analysts are very positive on GOOG, with 39 buys, 12 holds, and no sells.  The average 12 month price target is around 1227.  GOOG has been one of the best-performing large-cap tech stocks over the past year, returning 47% in that period.  Despite weak start for the broader market in 2014, GOOG is actually up on the year with this morning’s pre-market move (closed 2013 at 1120).  Short interest is negligible at 1.4% of the float.

Options Open Interest:  The total call to put open interest ratio is only around 1.2 for GOOG, relatively low for a large-cap tech stock that has had such strong performance recently.  Even 1 month average volumes are not too skewed, at about 1.25 to 1 in favor of calls over puts.  Of the weekly options, the weekly 1100 puts and the weekly 1140 calls have the most open interest.  The Feb7th 1200 calls have over 2500 of open interest, the March 1200 calls have over 5k of open interest, and the Jan15 1200 calls also have over 5k of open interest.

Price Action/Technicals:  GOOG has only had 2 down months since October 2012, making new all-time highs month after month in the process.  On the daily chart, the important psychological support is the $1000 level, where the stock gapped straight to after the last earnings report:

GOOG daily chart, 50 day in pink, 200 day in yellow, Courtesy of Bloomberg
GOOG daily chart, 50 day in pink, 200 day in yellow, Courtesy of Bloomberg

Over the past week, the rising 50 day moving average, currently around 1097, has acted as support.  The rising 200 day moving average, which has not been breached since July 2012, does not come into play until $947.

On the upside, the stock has no real resistance aside from last week’s low at $1167.

Volatility:  Implied volatility is near 2 year highs in GOOG ahead of this event, as options traders hike up expectations for a big move after last quarter’s 14% ripper after the earnings release:

30 day implied volatility in GOOG, Courtesy of LiveVolPro
30 day implied volatility in GOOG, Courtesy of LiveVolPro

GOOG is one of the few large cap stocks that has higher implied volatility this quarter compared to most of the past couple years.  So far, AAPL and FB have been big movers on earnings this week, so traders are taking that into account as well.

Our View:  Dan detailed our thoughts in the Name That Trade post from Friday:

I would make another fairly important point, analysts expect the company to re-accelerate earnings this year to 19% growth, after 2 consecutive years of 11% growth year over year, at a time where sales have seen massive deceleration, from 37% in 2012, to 20% last year, a rate that analysts to expect to stay constant in 2014.  This seems to me to be a fairly high hurdle, and with the stock trading at about 21.5x this years expected earnings growth it is not exactly cheap.

I know, I know, that is fabulous growth for a company the size of GOOG, and AAPL as recently as 2012 was growing sales in earnings at a faster pace on a larger scale, but we all know how that ended… the company had its first year over year earnings decline in more than a decade in 2013 and saw sales growth got from 40% plus to high single digits.

Again, I have no axe to grind, the company has been firing on all cylinders, and has been adequately rewarded. I just think it is a very crowded trade and priced to perfection, and as we learned in AAPL over the last 2 years, just as massive cult stocks like AAPL can overshoot on the upside they will most likely do the same on the downside.

Obviously a risky name on earnings, with some big moves in both directions in the past 2 years.  If we trade anything later today, we’ll be sure to update.