How are investors preparing for Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) earnings report Thursday night? More importantly, how are you preparing? Today, we’ll take a look at GOOG stock charts, some recent news and the options market.
Hopefully, this will give us an idea of what Alphabet is trying to say to bulls, bears and less directionally motivated traders.
Alphabet’s Earnings Picture
In front of Alphabet’s Thursday night earnings release, analysts expect GOOG to produce Q3 profits of $8.63 per share. The Street forecast implies earnings growth of nearly 20% compared to last year’s result of $7.21.
Analysts expect sales to grow smartly, too. Estimates are pegging GOOG revenues to also grow by roughly 20% to $17.99 billion in the third quarter.
The bulk of Alphabet’s sales are attributed to advertising dollars tied to its search business, so investors will rightly be focused on metrics like “total paid clicks” and “revenue per click.” However, updates on Google Fiber or the company’s entrance into the cloud market may also catch the Street’s fancy.
GOOG Stock Short-Term Trading Record
Alphabet has established a weak pattern of beating Street profit views. Over the last couple years, GOOG has topped estimates on three occasions but missed forecasts nine times.
Nevertheless, investor reaction has proven much stronger with gains in six of the last seven earnings events in the immediate aftermath of the report. Working backwards, GOOG stock has moved 3.33%, -5.41%, 1.32%, 5.61%, 16.26% and 2.91% in the first trading session following its announcement.
The overall investor reaction in GOOG stock has resulted in a solid average gain of 4%. Variability of 7% based on a one-standard-deviation reading yields an estimated range of -3% to 11%.
GOOG’s seven-day stock performance reflects a less sturdy, more volatile situation with an average gain of 1% and larger standard deviation of 9%.
GOOG Stock Chart
In my opinion, you’re unlikely to see a stronger-looking classic pattern breakout than Alphabet’s recent one. Shares spent roughly eight months consolidating in a constructive high-level, double-bottom pattern before breaking out last week to fresh all-time highs.
Based on the size of the pattern and bullish price action thus far, a conservative intermediate-term price target for GOOG stock would be $900 over the next couple quarters.
The forecast eyeballs the pattern’s high and low, adds the range to the breakout point, then rounds down modestly to come up with the provided century mark of $900.
Alphabet Options Pricing
In Monday’s session, the at-the-money weekly Oct 28 $815 calls were active, trading at roughly 850 contracts. Open interest of 130 points to fresh opening wagers on the upcoming earnings event.
For a buyer of this GOOG call, a mid-market closing price of $18.25 would require Alphabet shares to rally to $831.40 or 2.20% to break-even at expiration. Given the stock’s immediate and larger, bullish earnings reaction history, the long premium bet is attractive.
As described, GOOG’s price chart also appears to agree with a long call bet, using the earnings event as a catalyst for further upside.
That said, there’s no margin for error for this position, which expires Friday.
For the more statistically inclined, combined call and put premiums in the weekly Oct 28 $815 straddle market point to a 68% chance that GOOG stock will remain within a range of $766 to $860 through Friday’s expiration. The math behind the GOOG price range calculation is based on implied volatility of 55% with four trading sessions left.
The weekly contract is the purest play on the earnings event and tells us what traders collectively expect from GOOG in the immediate aftermath of its quarterly announcement.
In this instance, the dollar move up or down works out to about 5.7% in GOOG shares by Friday’s close. That’s modestly above recent day-after, earnings reactions, but within the range of outcomes we’d expect based on standard deviation.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
