Alphabet (GOOGL) – Paranoid Android

by Dan April 27, 2017 12:49 pm • Trade Ideas

Alphabet (GOOGL) will report Q4 results tonight after the close. The options market is implying about a 3.25% one day move tomorrow, in either direction. That’s basically in line with the 4 qtr average move of about 3.5%, but shy of the 10 year average of about 5.3%.

With the stock near $890 the tomorrow expiration 890 straddle (the call premium + the put premium) is offered at $29, if you bought that, and thus the implied earnings move you would need a rally above $919, or a decline below $861 by tomorrow’s close to make money, or about 3.25% in either direction.

While shares of GOOGL are very near its all time highs made yesterday, the stock’s 12% year to date gains while tracking the performance of the Nasdaq, and nearly double the performance of the S&P 500 (SPX) sorely lags other mega-cap tech stock’s like Apple, Amazon & Facebook that are up 24%, 22.5% and 28% respectively. This is surprising when you consider its valuation relative to its expected growth is the most attractive of the group in simple P/E terms, trades 26x expected 2017 eps growth of 20% on 19% sales growth.

From purely a technical standpoint, $840 appears to be a very healthy support level, the intersection of the Jan breakout and the recent lows, and the uptrend from the 52-week lows. You know the drill, there is no overhead resistance:

Bloomberg

What to expect? Let’s look no further than RBC’s Mark Mahaney’s key items to focus on for their Q1 print:

1) Core Google Revenue & Op Margins: We model Core Google gross revenue of $24.4B (22% Y/Y growth or 23% Y/Y ex-FX) and net revenue of $20.1B (22% Y/Y growth). We are also looking for $7.45B in Core Google GAAP Op Profit (37.5% margin on net revenue, down 100bps Y/Y).

2) Google Websites Revenue Growth: We are looking for $17.07B in Gross Google Websites Rev, which would represent growth of 19% Y/Y, or a 1pt deceleration on a flat comp.

3) Revenue & Op Loss Trends for Other Bets: We are looking for $265MM in Other Bets revenue and a GAAP operating loss of $994MM, which would be an increase from the $802MM loss level of Q1:16.

4) Paid Clicks, CPCs, And TAC: We are modeling cost-per-click (“CPC”) to deteriorate 5pts to a (20%) Y/Y loss in Q1 on a 4pt tougher comp. In terms of TAC, we anticipate that TAC will increase 20bps Q/Q for Network Sites and 30bps for Google Sites, going to 69.8% and 10.1%, respectively.

Regular readers know we don’t make buy or sell recommendations. But they also know that buying higher-fliers at all time highs into events such as earnings is also not something we do either. But, many of you may also know that my Options Action co-panelist Mike Khouw speaks some greek, and he likes to say fortuna paratus remunerat, which translates to fortune remunerates (rewards) the prepared. So as we did in AMZN earlier (here), lets take a crack at a hedge for existing longs and long stock alternative.

Hedge vs 100 shares GOOGL (890)

Buy the April28th 865 put for $5

Rationale – Protects entire stock 1 to 1 below the breakeven of 860 for a fraction of the price and the implied move. Speaking of the implied move, it is about $30 in either direction, so this put is right at that level and protecting against a breakdown below.


 

For those looking for higher highs but not thrilled about owning the stock here with the near-term risk that entails, here’s  a defined risk trade idea targeting a move higher for a fraction of the cost of the underlying:

Bullish targeting breakout above 920

Buy the May 920/970/1020 call fly for 5.50
  • Buy 1 May 920 call for 7.90
  • Sell 2 May 970 calls at 1.25 (2.50 total)
  • Buy 1 May 1020 call for .10

 

Breakeven – Gains above 925.50 with max gain of 44.50 at 970 on May expiration. Profits trail off above but remains profitable up to 1014.50. Losses of up to 5.50 below 925.50 and above 1014.50.