Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) joins the FAANG flood of earnings next week. Unfortunately for GOOGL stock investors, Alphabet’s earnings may come with a significant write-down of more than $5 billion. It may be enough to spook investors into selling on the news after earnings on Monday.
The $5 billion-plus write down would come from a European Union antitrust fine regarding Android. According to the E.U., Alphabet violated antitrust regulations by requiring mobile phone makers to include the Google search bar as the default search engine on Android. The result was a $5.07 billion fine, which Google is appealing.
Despite the appeal, Alphabet said in an SEC filing that it will account for the fine in its second-quarter report on this Monday, July 23. Doing so could wreck the company’s quarterly profit and catch more than a few investors off guard.
Speaking of quarterly expectations, Wall Street is anticipating a profit of $9.59-per-share from Alphabet, up considerably from last year’s earnings of $5.01-per-share. Revenue is expected to rise 23.7% to $32.19 billion.
Sentiment expectations indicate that many on Wall Street are not prepared for a $5 billion hit to Google profits. For instance, Thomson/First Call reports that 38 of the 45 analysts following GOOGL stock rate the shares a “buy” or better. That said, the 12-month consensus price target of $1,283.29 represents a modest premium of only about 7% to yesterday’s close. This would normally leave room for potential price-target increases, but I don’t see analysts bumping targets this time around.
Options traders are also quite bullish ahead of Monday’s report. Currently, the weekly July 27 put/call open interest ratio comes in at 0.54, with calls nearly doubling puts among those contracts most affected by Alphabet’s report.
July 27 implied volatility is pricing in a potential move of about 5% for GOOGL stock, placing the upper bound at about $1,260, with the lower bound at $1140.
Two Trades for GOOGL Stock
Bear Put Spread: With a massive hit to earnings coming Monday, investors are likely to be shocked by Alphabet’s earnings report — and not in a good way. Traders looking to profit from a surprise decline in GOOGL stock might want to consider an Aug $1,160/$1,180 bear put spread.
At last check, this spread was offered at $6.11, or $611-per-pair-of-contracts. Breakeven rests at $1,173.89, while a maximum profit of $13.89, or $1,389-per-pair-of-contracts — a potential 120% return — is possible if GOOGL closes at or below $1,160 when August options expire.
Bull Call Spread: For those options traders looking to side with the bulls ahead of Google earnings, an Aug $1,230/$1,250 bull call spread has potential. At last check, this spread was offered at $7.20, or $720-per-pair-of-contracts. Breakeven rests at $1,237.20, while a maximum profit of $12.80, or $1,280-per-pair-of-contracts, is possible if GOOG closes at or above $1,250 when August options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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