Trade of the Day: Google (GOOG)

Recent moves by Google should keep their ad revenue momentum strong

   

Recommendation: Buy GOOG under $800 per share with a price target of $860 by September 2013.

Option Alternative: Buy to open the September calls at the $790 strike price for $55 per share or less. Advanced option traders may choose to cover that long position with a short call in March in a diagonal spread.

Whether it is a new acquisition or a policy that can set the standard for the industry, Google (NASDAQ:GOOG) has taken several steps that will help it continue its climb to break $800 a share for the first time.

AdWords

An issue for companies like Google that rely heavily on Internet ad revenue is the increasing number of people using mobile devices instead of personal computers. This leaves these companies tasked with putting ads on these smaller devices and getting people to click on them as they would on their personal computers.

Google is updating AdWords by rolling out mobile enhancements to the popular advertising program, which allows businesses to choose keywords. They then pay Google every time someone performs a search using those keywords and clicks on their ad. Currently, more than $40 billion of Google’s annual ad revenue comes from AdWords.

Many business owners report that they have seen sales increase with AdWords, but they also have seen the cost per click increase dramatically. And even if business owners don’t care to advertise on mobile devices, they’ll still have to pay for it, which means they’ll pay higher rates.

Google said the enhanced campaigns allow businesses to better tailor their ads to meet the growing population of people who use mobile devices. The question becomes whether small business owners will take the bite.

Partnering With Yahoo!

In the meantime, Google and Yahoo! (NASDAQ:YHOO) have partnered in a non-exclusive contextual advertising deal. This partnership includes Google ads appearing on Yahoo pages and certain co-branded sites using Google’s AdSense for Content and AdMob services.

In a statement released by Yahoo about the partnership it was said: “Say you’ve been shopping for boots. If you see an ad for boots, that’s instantly going to pique your attention more than an ad for, say, a car battery. That’s better for users. This is why contextual advertising is such a powerful tool.”

The partnership is clearly a win-win for both Google and Yahoo. However, Google stands to benefit more because it will retain a part of the revenues generated from the ads displayed on its partner sites. Last year, Google’s ad sales on its partner sites totaled $12.5 billion, according to Zacks Equity Research.

E-Commerce

Google recently acquired Channel Intelligence for $125 million. The buy will help Google improve its online sales efforts and e-commerce. It has tough competition in this area, including Amazon (NASDAQ:AMZN). The deal is expected to close during this quarter.

Channel Intelligence specializes in providing companies with tools that tailor a person’s shopping experience. For example, it has a service called “where-to-buy,” in which companies can alert shoppers to where they can buy a particular item online.

Some of Channel Intelligence’s existing customers include Best Buy (NYSE:BBY), Hewlett-Packard (NYSE:HPQ) and Target (NYSE:TGT).

To get an idea of the dollars involved in this area and why it’s so important, consider this. Overall spending on mobile advertising in the U.S jumped 180% last year to about $4 billion, according to eMarketer. It should reach $7 billion this year, and nearly $21 billion by 2016.

Google already has the most market share in the mobile ad search space, so this acquisition will help maintain it.

Bottom Line

The mobile ad business is growing crowded, and every company worth its salt is trying to carve out as much market share as possible.

These moves should continue Google’s momentum. For fiscal 2012, the company reported $50 billion in revenue, the highest ever achieved. Also, during Q4 2012, it reported earnings of roughly $11.34 billion, which was up from the roughly $8 billion reported in the same period of 2011.

The company will continue to make strides, and we see no reason why $800 a share will be its peak. The key will to continue improving in the mobile space without hurting margins.

Recommendation: Open a long position in GOOG under $800. The stock just recently broke near-term resistance at $775 and should continue to $860 based on the size of the last retracement in October-November.  On average, GOOG has taken four to six months to move that far following prior breakouts and we suspect that will be true this time as well.

Options Alternative: Buy to open the GOOG September 790 calls for $55 per share or less. Because of the cost of the option and the length of time this trade is likely to take, more advanced option traders may consider a diagonal spread with the September 790 calls and the short March 785 calls with the 785 strike. That trade does run the risk of being in the money by March expiration, but if the market does pull back a little in the short-term, this could be a great way to hedge that risk while still maintaining a bullish position.

John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here.


Article printed from InvestorPlace Media, http://investorplace.com/247trader/trade-of-the-day-google-goog/.

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