Alphabet (GOOGL) Q3 Earnings Preview / Trade Ideas

by Dan October 25, 2018 2:02 pm • Trade Ideas

Alphabet (GOOGL) will report Q3 results tonight after the close. The options market is implying about a 5.5% one day move tomorrow in either direction, which is rich to the average one day move over the last 4 quarters of about 4.5%, and inline with the 10-year average of about 5.5%.

With the stock near $1100 the Friday weekly Oct 26th expiration 1100 straddle (the call premium + the put premium) is offered at $57, if you bought that, and thus the implied move, you would need a rally above $1157, or a decline below $1043 by tomorrow’s close to make money, or about 5.5% in either direction.

GOOGL’s decline off of its recent all-time highs made in July are about in-line with AMZN’s 14%, but GOOGL’s 4.5% ytd gains is a far cray from AMZN’s 50% ytd return.  Looking at GOGL on next year’s expected eps and sales growth, the stock looks fair cheap, trading 23x 2019 expected eps growth of 21%, on an astounding 20% expected sales growth to $131 billion. I guess the real issue is whether or not this company will face similar costs that Facebook (FB) has guided to in an effort to better police their platform for bad actors. Maybe there is a discount already being placed on GOOGL as investors have extrapolated FB’s guide down, and subsequent 31% decline in the stock from its July all-time highs.

To my eye, the near-term technical set-up looks clear, 1150-1200 appear to be resistance and 1050-1000 support:

The implied move places the stock very near each range in each direction.

As for what to expect in the quarter, top-ranked Internet analyst Mark Mahaney from RBC, who rates GOOGL a Buy with a $1400 target expects:

For Q3:18, we are expecting gross revenue of $33.73B, net revenue of $27.18B, Adjusted EBITDA of $12.47B, and GAAP EPS of $9.24. Our estimates are a touch below consensus across the board (at $34.04B gross revenue, $27.29B net revenue, $13.06B Adjusted EBITDA, & $10.42 GAAP EPS).

And identifies the following keys to the quarter:

1) Revenue and Operating Margin Trends for Core Google: We are looking for Core Google gross revenue of $33.57B (up 21% Y/Y) and net revenue of $27.02B (up 22% Y/Y), driven by ongoing strength in Mobile Search, Programmatic and YouTube. We are also looking for $10.24B in Core Google GAAP operating profit (a 30.5% margin, which would be down 50bps Y/Y). 2) Gross Google Properties Revenue: Within Core Google is Google Properties Revenue which includes core Search and YouTube. We are looking for $24.08B in Gross Google Properties Revenue, which would represent growth of 22% Y/Y. 3) Revenue and Operating Loss Trends for Other Bets: We are looking for $165MM in Other Bets revenue and a GAAP operating loss of $853MM, which would be an increase from the $732MM loss level of Q2:18. 4) TAC: In terms of TAC, we are generally modeling ongoing growth in TAC (20bps Q/Q for both Google Properties and Network Sites, bringing them to 13.1% and 70.9%, respectively).

So what’s the trade? Much like the post on AMZN, GOOGL given its high stock price and high implied vol into earnings is not an easy one, so to find decent long premium risk-reward trades you might have to go out of the money a bit. But as usual I’ll offer our disclaimer that is a tough way to make a living buying option into events, you need to get a lot of things right to just break-even, first and foremost direction, the magnitude of the move and of course timing.

If I were to pick a bullish strategy I might consider being long a call at the resistance level and sell an out of the money call above the range identified, for instance:

Bullish Trade Idea: GOOGL ($1100) Buy Nov 1150 – 1250 call spread for $20

-Buy to open 1 Nov 1150 call for $22

-Sell to open 1 Nov 1250 call at $2

Break-even on Nov expiration:

Profits of up to 80 between 1170 and 1250 with max gain of 80 at 1250 or higher

Losses of up to 20 between 1150 and 1170 with max loss of 20 at 1150 or lower.

Rationale: the options market is saying there is only a 35% chance this trade idea is break-even on Nov expiration but offers a potential payout of 4x the premium at risk.


Bearish Trade Idea: GOOGL ($1100) Buy Nov 1060 – 950 put spread for $20

-Buy to open 1 Nov 1060 put for $25

-Sell to open 1 Nov 950 put at $5

Break-even on Nov expiration:

Profits of up to 90 between 1040 and 950 with max gain of 90 at 950 or lower

Losses of up to 20 between 1040 and 1060 with max loss of 20 at 1060 or higher

Rationale: the options market is saying there is only a 40% chance this trade idea is break-even on Nov expiration but offers a potential payout of a little greater than 4x the premium at risk.