Name That Trade – $GOOGL frugal no more?

by Dan July 16, 2015 12:02 pm • Commentary

Event: Google reports Q2 earnings tonight after the close, the options market is implying about a 3.5% one day move. With the stock at $590, the July 590 straddle (call premium plus the put premium) is offered at $21. If you bought that, then you would need a move above $611 or below $569 to make money on tomorrow’s close.  The average one day move over the last 4 qtrs has been about 3.6%, and the 8 qtr avg of about 4.7%.

Price Action / Technicals:  The stock has rallied 10% in the last week, representing most of GOOGL’s ytd gains of 11%:

[caption id="attachment_55390" align="aligncenter" width="600"]GOOGL 1 month chart from Bloomberg GOOGL 1 month chart from Bloomberg[/caption]

Since breaking out in Oct 2013, the stock has been range-bound between $500 and $600 since, and having recently spent most of the first half of 2015 flat-lining in and around $550 before the very recent explosion:

[caption id="attachment_55391" align="aligncenter" width="600"]GOOGL 2 year chart from Bloomberg GOOGL 2 year chart from Bloomberg[/caption]

My View:  In May we started looking at the stock’s relative under-performance in the internet space, and too many large cap tech peers. We were positively disposed to the stock with the incoming CFO as a potential catalyst for the shares (read here and here).   The stock’s move is likely associated with investor excitement about the potential for the new CFO (from Morgan Stanley) to cut costs and deploy the company’s $70 billion in cash that could accelerate growth through acquisitions and manage higher eps growth through share re-purchases.

On Fast Money the other day I suggested that the recent move may discount some good news in the short term as the CFO’s start date was May 26th and I suspect it is very unlikely that the company has made any concrete changes to capital allocation.  A breakout above $600 may take some time to play out, and investors will quickly become focused on an expected Fall analyst meeting where I assume Ruth Porat (CFO) will take center stage and likely map out some new initiatives.  I likened the situation to when Tim Cook came into Apple. Many thought he would toe the line so to speak, but after a little bit he started to map his own course, with some fairly significant divergences from that of his predecessor. Now, a new CEO is much different than a new CFO, but the CEO of Google is not an operator the way Tim Cook was and I suspect they brought a very accomplished banker from Wall Street to get to work on some old school financial management.

So what to expect?  In a nutshell, a beat could be in the stock after the recent run, but any hint to capital return, and the stock breaks out above $600.  (I would be surprised if they do that explicitly, as the company has been notoriously tight lipped on future plans).

A miss and no hints to changes that investors are expecting and the stock is back at $560. A bad miss and back at $540.

What to do into the print?

The July 590 straddle (one day) looks cheap to me at $21, for stone cold gamblers, it looks like a scoop.

For those with a directional view the July 590 calls and the July 590 puts offered at $10.50 (stock ref $590) look very cheap with a break-even down 1.8% at $579.50, or up 1.8% at $600.50

At this point we kind of muffed up our trades (read here and here) that could have been much bigger winners. And we’re hesitant to chase here, but remain positively disposed on a pullback.