Shares of internet giant Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) have charged off the recent lows along with the rest of the overall market. GOOG stock rose nearly 10% over the first six days post Federal Reserve meeting before weakening slightly. This is all in the face of rising interest rates. The 10-year yield is now firmly back above 2% and at the highest levels since May 2019. Short-term rates have exploded even more.
At some point rising rates will dent the red-hot rally for Alphabet and other tech stocks. With that said, here’s a closer look at what investors (and traders) might expect from GOOG moving forward.
A Closer Look at GOOG Stock’s Valuation
First, let’s take a closer look at GOOG’s valuation.
GOOG has soundly beaten earnings over the past four quarters yet shares remained subdued. The combination of better earnings and a flat stock price leads to much lower multiples. Its current price-to-earnings now sits at just under 25x. This is well below the 10 year median of 28.5x. Other traditional valuation metrics such as price-to-sales and price-to-free-cash-flow are also on the cheap side.
This should help provide a floor for GOOG stock on any meaningful selloff.
InvestorPlace contributor David Moadel echoed a similar sentiment in his recent research article on Alphabet. He likes the valuation and the future of the cloud business. Another challenge of the $3,000 resistance level looks to be in the offing.
Technical Breakdown of Alphabet Shares
GOOG stock is nearing overbought readings. The 9-day RSI is approaching the 70 level. The MACD is climbing to recent extremes. Meanwhile, the Bollinger Percent B is hovering around 100.
Shares are trading at a steep premium to the widely followed 20-day moving average. The previous times all these indicators aligned in a similar fashion marked a significant short-term top in GOOG stock.
Alphabet remains in a well-defined, albeit wide, trading range. $2,500 is major downside support. $3,000 is serious overhead resistance. Look for GOOG stock to remain rangebound over the coming months. Earnings in late April/early May and the impending stock split may be catalysts that challenge the range.
Seasonality
June tends to be one of the worst performing months for GOOG stock. It has risen less than half the time over the past nine years and shows a loss of nearly 1% on average. July, on the other hand, tends to be a stand-out performer. Shares have risen in July for eight of the past nine years. The average gain during July in that time frame is a very respectable 8.4%.
While history is no guarantee of future success, it does make selling in June and buying in July a very intriguing backdrop for a trade set up.
The company announced a 20:1 stock split during the latest earnings release on Feb. 1. The split is due to take place on July 1. Anyone owning GOOG stock prior to that date will receive 19 times more shares. The share price will be reduced by a like amount to make things equal. Investors looking to put smaller allocations to work in Alphabet would be well served to wait until the stock splits and share prices become much more affordable.
I had a bullish outlook for GOOG stock in my last research article from Feb. 16. Since then, shares have moved up nearly 100 points and my short-term outlook has now turned somewhat more neutral. Price does matter. Selling an out-of-the money call spread in June to position for a period of consolidation pre-split makes probabilistic sense. It is also a natural hedge to the July bull call spread I recommended previously. This will help buffer some earnings related risk. Plus it benefits from a weak seasonal stretch in Alphabet.
How to Trade GOOG Stock Now
Sell the GOOG June $3,000/$3,050 call spread for a $14 net credit.
Maximum gain with the trade is the $14 initial credit received or $1,400 per spread. Maximum risk is $36 or $3,600 per spread. Potential return on risk is 38.88%. The short $3,000 strike price provides a roughly 8% upside cushion to the current price of GOOG stock.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
