$GOOG Q1 Earnings Preview

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Event:  GOOG reports Q1 earnings today after the close.  The options market is implying about a 5.5% move, which is in line with the 4 qtr avg move of 6%, and the 8 qtr avg of about 5.25%.

Sentiment:  Wall Street analysts are very positive on GOOG, with 39 buys, 14 holds, and NO sells, and an average 12 month price target of $671.  Quite rare to have a company as widely followed as GOOG, with no sell ratings. Short interest is negligible at around 1% of the float.

Options Open Interest:  Both total open interest and the one month average volume favor calls over puts by a ratio of about 1.25 to 1 for GOOG.  The bulk of the open interest is in the April and May expiries, with the $550 strike the most relevant strike for the near-term expires.  The $500 strike (formerly $1000) has significant open interest throughout maturities.

Fundamentals:  GOOG’s appeal among the investment community over the past few years (GOOG has doubled since June 2012) is that it’s one of the few mega cap stocks in the U.S. that offers double digit earnings growth.  In fact, GOOG has grown earnings AND sales at least 10% in every year since the stock IPO’ed back in 2004.  That’s quite a feat, especially for what is now a $375 billion market cap company.

GOOG is expected to grow sales and earnings at a double digit pace for the next few years as well, and the company is centrally positioned to take advantage of the long-term shift in advertising to online platforms.  The real question with GOOG, as with many growth stocks, is whether it’s a good value at current levels.

Dan detailed the positioning problem for the stock in a Name That Trade post back in January:

Again, I have no axe to grind, the company has been firing on all cylinders, and has been adequately rewarded. I just think it is a very crowded trade and priced to perfection, and as we learned in AAPL over the last 2 years, just as massive cult stocks like AAPL can overshoot on the upside they will most likely do the same on the downside.

Since then, GOOG rallied about 10%, and sold off almost 15%, an illustration of the crowded positioning, since there hasn’t really been any negative news specific to the stock.  At this point, positioning is likely a bit cleaner, but this is still a widely held stock among the fund community, so the reaction to earnings might be more telling than the actual results.

Price Action / Technicals:  GOOG sold off almost 15% since its all-time high around $615 in early March:
GOOGL daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg

GOOGL daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg

The stock has found support around $530 in the past week.  The rising 200 day moving average, now around $513, has not been breached in more than a year.  On the upside, the 50 day moving average is now downward sloping, and currently comes into play around $585.  GOOG closed 2013 at $560.90.

Volatility Snapshot:  GOOG 30 day implied volatility recently hit its highest level of the past 2 years:

GOOG 30 day implied volatility, Courtesy of LiveVolPro

GOOG 30 day implied volatility, Courtesy of LiveVolPro

While the upcoming earnings event has been part of the reason for the increase in implied volatility, the swift, volatile selloff of the past month is a major reason for the 2 year high in implied vol as well.  If GOOG stabilizes after earnings, then implied volatility is likely to fall back to at least the low 20’s, despite the recent jitters.  

Our View:   GOOG is in the middle of its 6 month range (since its October earnings gap), with the 200 day ma as support on the downside, and the 50 day ma as resistance on the upside.  Fundamentally, the stock looks well positioned to continue its growth, but positioning still feels crowded based on the recent price action in the past month.  The situation looks rangebound, but GOOG has had a few large gaps on earnings in the past couple years, so we’re wary of getting involved on the event.