Make a Bullish Run (Well, Jog) at Google

by Joseph Hargett | April 18, 2013 11:15 am

Google (NASDAQ:GOOG[1]) will enter the earnings confessional after the close this afternoon, and while investors surely will be interested in the company’s bottom-line figures, there are a plethora factors that could influence the stock’s short-term price action.

For the record, Google is expected to post Q1 earnings of $10.64 per share on revenue of $11.11 billion, according to FactSet. In the same quarter last year, Google earned $8.75 per share on revenue of $10.6 billion. However, Google had yet to make its $12.4 billion purchase of Motorola Mobility in the first quarter of 2012, which the company bought primarily for its 17,000-plus patents.

While investors probably will take note of Google’s progress with Motorola Mobility, the company’s online and mobile ad revenue will likely be the hottest topic for discussion. On a year-over-year basis, Google’s ad revenue is seen rising nearly 20%, according to consensus estimates, with much of this revenue derived from Internet search. That said, mobile ad revenue and “cost per click” — or the price advertisers pay to run ads on Google — will be heavily scrutinized.

During the past five quarters, “cost per click” has steadily declined, with Google making up the difference in revenue out of sheer volume. Additionally, advertisers currently pay less for mobile ads despite a steady consumer transition to mobile devices. What’s promising for Google is that the decline in “cost per click” is slowing, and the company is making a heavy push toward mobile advertising by changing the way it sells ads. More details on this shift and the company’s ad strategy will go a long way to bolstering investor confidence.

Google also could garner support with additional details on Google Glass[2]. The device is generating an early buzz akin to the early days of the Apple iPhone, with Piper Jaffray analyst Gene Munster recently noting that similar devices will someday replace smartphone[3]s.

So, with a wealth of data to digest, let’s take a look at how Wall Street currently views Google from a sentiment standpoint.

On the analyst front, expectations are considerably high, with EarningsWhisper reporting that the whisper number for Google’s first-quarter earnings arrives at $10.83 per share, 19 cents better than the consensus estimate.

Meanwhile, data from Thomson/First Call reveals that 26 of the 38 analysts following GOOG shares rate them a “buy” or better, compared to 12 “holds” and no “sell” ratings. Alternately, the consensus 12-month price target of $860 represents a premium of only about 9.9% to GOOG’s close at $782.56 on Wednesday. So, while the brokerage community is “buy” heavy, there is room for potential price-target increases in the wake of a positive quarterly report.

Options traders are nowhere near as enthusiastic. Taking a look at all options set to expire before the end of May (including weekly options), GOOG sports put open interest of 85,067 contracts compared to 87,922 call contracts, resulting in a misleading put/call open interest ratio of 0.96. I say misleading because, while calls outnumber puts on an absolute level, GOOG is historically a call-favorite among options traders. In other words, GOOG has attracted considerably more put open interest than is typical for the stock.

Most of these puts are located at the weekly April, 20 750 strike, which sports open interest of 4,919 contracts. Other notable accumulations include the weekly April 20 760 put, with 4,533 contracts, and the April 20 720 strike, with 3,633 contracts. All three of these strikes are currently well out of the money.

On the call side, there are heavy accumulations at the weekly April 20 850 strike, with 5,210 contracts, as well as the April 20 875 strike, where 3,559 contracts are open. You also will note that these strikes are currently deep out of the money.

On a side note, it is not unusual to see heavy accumulations of deep-out-of-the-money puts and calls for GOOG, both because the stock’s options are considerably expensive and because these options are also heavily utilized to hedge stock positions.

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Turning to implied volatility, weekly April 20 options appear to be pricing in a post-earnings move of about 4.9% for GOOG, placing the upper rail of such a move near $818 and the lower rail near $741. A collapse to $741 would place GOOG near support at its 20-week moving average, while a breakout to $818 would put the stock back above key daily moving averages and within striking distance of a fresh all-time high.

Given Google’s fundamental prospects, the potential “wow factor” for any data on Google Glass — and the fact that the shares remain in long-term uptrend and are far from overbought due to recent market weakness — the stock looks primed for a potential bullish play. To help offset the cost of GOOG options, a bull call spread — probably in the May series — could be just what you are looking for.

Playing things a bit conservatively, let’s look at the May 770/800 bull call spread.

This trade was last asked at $14.90, or $1,490 per pair of contracts. Breakeven for this spread lies at $784.90, while a maximum profit of $15.10, or $1,510 per pair of contracts, is possible if GOOG closes at or above $800 when May options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

  1. GOOG:
  2. Google Glass:
  3. Gene Munster recently noting that similar devices will someday replace smartphone:

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