The days when Alphabet Inc (NASDAQ:GOOGL) could dabble in whatever side project caught its fancy may be over. Last quarter’s earnings miss underscored this reality all too firmly for Alphabet investors, who had grown used to quarter after quarter of outperformance. That said, even after a bit of streamlining during the past three months, there are still no guarantees for a post-earnings rally for GOOGL stock.
Alphabet’s main source of revenue — advertising — is under fire. Increased competition from Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN) and Snap Inc (NYSE:SNAP) is finally catching up to the company’s bottom line.
What’s more, Facebook’s WhatsApp and Snap’s Snapchat are fundamentally changing the way millennials are accessing the Internet, with trends shifting more toward messaging apps and away from broad-based search ad revenue that remains Google’s bread and butter.
As a result, Alphabet has made some changes during the past several months, scaling back several side projects or shuttering them entirely in favor of putting its money into more profitable ventures. Unfortunately, the moves have only ramped up quarterly earnings expectations, with analysts looking for GOOGL stock to play catch-up to last month’s miss.
Sentiment and Charts
Currently, Wall Street is expecting a profit of $7.38 per share from Alphabet, down slightly from earnings of $7.50 per share in the year-ago period. Revenue is expected to come in at $24.21 billion, up 19.5% year over year.
Wall Street’s high hopes, meanwhile, are reflected in the brokerage community. According to Thomson/First Call, a whopping 43 of the 45 analysts following GOOGL stock rate the shares a “buy” or better. The 12-month consensus price target of $979.52 isn’t nearly as bullish, but it still rests nearly 17% above Alphabet’s current perch.
Turning toward GOOGL options activity, traders remain bullish on Alphabet’s quarterly report, but are showing signs of apprehension beyond next week.
Currently, the April 28 put/call open interest ratio (i.e., the one likely most affected by Alphabet’s April 27 earnings report) arrives at 0.52, with calls nearly doubling puts for the series. However, this ratio jumps to 0.81 for the May series, as concerns emerge about the strength of any follow-through buying.
Click to Enlarge Overall, April 28 implieds are pricing in a potential post-earnings move of about 4.2%. Currently, this places the upper bound at about $875, while the lower bound lies near $805.
Technical support should h0ld firm in the $800 area, but another earnings miss could force a breach and additional selling pressure. Meanwhile, $880 remains the cap on the upside, and with elevated expectations, that region may be tough to overcome.
2 Trades for GOOGL Stock
Put Sell: I’m not convinced that Alphabet is far enough gone that another earnings miss is in the cards. However, I’m also not convinced that next week’s report will live up to the bullish sentiment currently levied against the shares.
As such, caution in the form of a neutral-to-bullish put sell position may be the best bet for profiting on GOOGL right now.
Along those lines, the May $800 put has plenty of potential. At last check, this put was bid at $7.10, or $710 per contract. The upside to this put sell strategy is that you keep the premium as long as GOOGL stock closes above $800 when these options expire. The downside is that should Alphabet trade below $800 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $800 per share.
Call Spread: If you’re willing to buy into the hype ahead of earnings, then a May $860/$865 bull call spread has plenty of potential. At last check, this spread was offered at 53 cents, or $53 per pair of contracts. Breakeven lies at $860.53, while a maximum profit of $4.47, or $447 per pair of contracts, is possible if GOOGL closes at or above $865 when May options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
