MorningWord 11/18/14: $GOOGLy Eyes

by Dan November 18, 2014 9:34 am • Commentary

A few weeks ago I took at look at Google’s (GOOGL) inability to keep pace with the broad market.  The bull case is fairly simple, as summarized in my post of November 4th:

There are few who would dispute that Google (GOOGL) has been, and on current estimates remains, one of the best large cap growth stories on a valuation basis.  The stock trades at a PE/G (PE to Growth rate) of 1, trading at 18x next year’s expected EPS growth of 18%.  For investors focused on growth over value, paying a market multiple for that sort of growth is a decent proposition.

For most investors, this valuation-to-growth proposition should be quite attractive for a company with the sort of positioning GOOGL has in its core business, its balance sheet, etc.  When I placed the near term bearish trade earlier in the month, the stock was $560.  I felt one reason for the relative weakness of late could be investors’ questioning 2015 estimates, from prior post:

it’s important to note that as GOOGL’s sales have climbed above $50 billion in 2014, the rate of ascent has declined, from 37% in 2012, to 19% last year, to an expected 11% this year. Yep you know the drill, harder to grow a larger base

At the time, I remarked the stock was seeing waning momentum that was evident in the impending “death cross” of the 50 day moving average crossing below the stock’s 200 day moving average, from Nov 4th:

 

GOOGL 1yr chart from Bloomberg
GOOGL 1yr from Bloomberg to Nov 4th from Bloomberg

Flash forward to last night’s close, and the stock broke that short term technical support level on seemingly no news.  The “Death Cross” is in full effect:

GOOGL YTD chart from Bloomberg
GOOGL YTD chart from Bloomberg

Here is the thing, I have no smoking gun on GOOGL.  It’s a perfectly awesome company but for some reason the stock stinks right now.  Are there broader implications of the weakness of the third largest stock in the Nasdaq 100, and the 4th largest in the S&P 500?  Why should U.S. equity investors take note?  Well first, it is safe to say that aside from Apple (AAPL) there are few companies that have gained as much market cap as GOOGL has since the lows of the financial crisis.  GOOGL bottomed in December 2008, months before the S&P 500, demonstrating strong relative strength:

GOOGL since 2008 from Bloomberg
GOOGL since 2008 from Bloomberg

From its lows in December 2008 (green circled), GOOGL appreciated almost 400% to its highs earlier this year, doubling the performance of the S&P500.  To sum up this chart, the stock bottomed well before the market in the throes of the market crash and interestingly topped out (at least for now) well before the S&P500 (red circled), having put in its all time high back in March. The stock now sits about 11% below that high, and down 2.5% on the year.

There is one other chart that sticks out to me. The 3 year chart of GOOGL looks precarious on a short term basis.  The stock recently broke below the uptrend that has been in place since breaking out at $300 in mid 2012:

GOOGL 3yr chart from Bloomberg
GOOGL 3yr chart from Bloomberg

It feels like a re-test of the double bottom lows of this yea. Around $520 could be in the cards on a near term basis.  On a longer term basis if sales growth does not materialize the way analysts expect, from 11% in 2014 to the expected 19% in 2015, I suspect the stock will ultimately attempt a gap fill of the $450 – $500 range from Q4 2013.

To be clear, I’m not hating on GOOGL, but the relative underperformance and the technical inputs at the moment are overpowering what looks like fairly sound fundamentals at a very reasonable price.  In these sorts of set ups it sometimes makes sense to invoke prudence as opposed to sticking stubbornly with a (perhaps stale) fundamental view.