Google (GOOGL) reports their Q4 results tonight after the close. The one day implied move is about 4% vs the 4 qtr avg move of about 3.65%.
GOOGL has been on our radar for months on the short side given its weak relative strength to most large cap tech peers and the broad market, despite it’s very reasonable valuation (read latest trade here). It is my belief that there is a massive disconnect between Wall Street consensus estimates for 2015 that call for 16% earnings growth and 18% sales growth, and that of the investors. Meaning, the stock trades at a market multiple, a little better than 1x expected growth, that is ludicrous for a meg-cap stock like GOOGL. Which leads me to believe that the stock’s under-performance over the last year, down about 10% vs the S&P500 up about 11%, is a function of the buy-side not believing in current consensus estimates.
We closed our short in Dec and have been waiting for a re-entry, and we missed it last week as the stock had move back to the downtrend line, and we should have kept a closer eye on this one as this was my view on Jan 9th (read here) when the stock was near $500:
pressing an oversold condition has not been a winning strategy in single stock land of late, we would prefer to re-short on a bounce back towards the downtrend but we’ll be keeping an eye on this under-performer.
The stock now has re-traced the bounce off of support, and is once again at a tricky spot heading into a potentially volatile event:[caption id="attachment_50408" align="aligncenter" width="600"] GOOGL 2yr chart from Bloomberg[/caption]
This is a kind of easy one from where I sit. If the company misses and the commentary feels like a guide lower (company does not give official guidance) then I suspect the stock fills in the entire gap from the late 2013 move back to $450, massively outperforming the implied move of 4%. If that is your view, then the Jan30th 500 puts (stock ref $507) offered at ~$7 seem very dollar cheap.
If your view is that the company issues results and commentary that speak to the mid to high teens expected growth Wall Street analysts expect, then the Jan30th 507.50 calls (stock ref $507) offered at about $10 seem dollar cheap.
The question you have to ask yourself is this set up has the potential to be Microsoft (MSFT) (down 10% post results Tues) or Apple (AAPL) (up 6% post results yesterday), which were massive moves in their own right for a couple of the largest market cap companies in the world? Or will it be more like Facebook (FB) basically unchanged today after its results? I would say the FB scenario is unlikely given the stock’s under-performance, and the general disagreement on the stock. FB investors seem a tad more content with the company’s spending than GOOGL’s do.
Regular readers know where I stand on GOOGL, they have a real time search problem, they have a social media problem and a mobile messaging problem and I think they should buy Twitter (TWTR) to plug a lot of these holes (read here). If they were to pay $40 billion in stock and cash (they have $60 billion in cash net of debt) I suspect the stock would rally 5 to 10% making up a good bit of the purchase price.
I am on the sidelines for now, I am not inclined to play for a bounce, and in my heart of hearts would love to play the hero and attempt the gap fill, but we know that playing long premium into an earnings event are generally low probability trades.