Way back on 1/6 I said this:
“GOOG is on a tear, bashing through $450 yesterday and will have a lot of action into today’s CES presentation of “Something big involving media.” With the stock up $40 since Friday, it had better be a $10Bn idea!
Now I am certainly no Google basher, I called this recent action way back on 11/12 when Google was a TOTD and way down at $390 and my $3,500 price target for 2015 is still the street high (but others are catching up fast) but I do urge caution at this level.
We may see $460 today but it will be a very tough barrier to get past. Both GOOG and YHOO partnered with MOT to provide enhanced web services on the world’s most popular phones and I feel safer taking a position in YHOO at this point than Google.
With earnings coming up, I think YHOO will certainly beat estimates for the quarter and the year while GOOG has to fire on all cylinders to hit the $5.88 per share the street is expecting. Google is expected to beat, not hit, their targets which has gotten tougher and tougher as more analysts jump on their bandwagon.
GOOG earnings should come just after Yahoo’s and, if you must play that, I would recommend the spread of the March $500 call for $13.45 and the March $410 put for $12.65. A $30 move in GOOG either way should put you in the money but it takes a strong stomach to ride out this sort of spread. You can offset this play by selling the Feb $520 call for $5.90 and the Feb $390 put for $4.85 but you are capping your gain at around $20 if the stock really takes off or plummets before they expire.”
I got out of that March $500 call with a 30% profit last week and got out of the $410 put for $21 yesterday (but I will so regret not keeping them!).
Please also reread my 1/26 post where I called this earnings pretty much right on the nose: http://philstocks.blogspot.com/2006/01/google-watch.html
I am especially proud of this observation: “look at the Earnings History Surprise row. Notice the narrowing trend downward? Yahoo went from a 14% surprise up last quarter to a -5% miss this quarter – If Google does that the Titanic will look unsinkable by comparison.”
“Phil, if you’re so smart then why did you sell your puts?” You may say. The simple answer to that is that they were too darn expensive. At yesterday’s close of $432 (ah, remember when Google was at $432?) the $410 puts were selling for $21. That means Google had to finish out the month at $389 (a $43 drop) just for me to break even. While I thought it was likely, I also decided it was going to be safer to just play the momentum after earnings rather than commit a chunk of cash on a bet that would have been wiped out had I placed it on any of Google’s previous earnings reports.
Although I am sad that I took my puts off the table (although it remains to be seen if I really would have done better than the 70% I already made) I am very happy to have the cash on the side to see which way the stock moves today.
Let’s also keep this in perspective. While a $60 drop in a stock may seem shocking, it is still only 15%, less money than we made on 15 different plays just last week! Yahoo dropped from $40 to $34 (15%) after their earnings (and will drop more tomorrow in sympathy) on the 17th, the same day that Intel went from $26 all the way down to $22 (15%). Intel’s market cap is the same as Googles yet no one portrayed that as doomsday for the markets…
Now Yahoo and Intel missed by about a penny between them – Google missed by .46! Be warned, Intel got 8 downgrades the day after earnings, Yahoo got 3 (but 1 upgrade). 30 analyst currently have a buy on Google with 8 at “strong buy” or highest ratings, the average price target is well over $500. Only Stifel Nicolause has a sell on the stock so props to them for calling that right on the 18th (only 2 weeks after my downgrade).
Trick #1 for the day is to figure out how bad Google’s numbers actually were and how that will affect the rest of the market.
On the surface, the company missed earnings estimates (they don’t give guidance) by 25% while revenues were pretty much right in line (and 86% increase from last year).
One mitigating factor is that a full .25 of the shortfall was due to an increase in taxes paid vs. Prior quarters. While this is not a one-time event it is very understandable due to the extremely complex international revenue structure the company functions under. Here is a quote from another blog site that sums up the issue: http://internetstockblog.com/article/6354
There is, unfortunately, no other mitigating factor that I see so at best we are looking at a 12% miss no matter how you slice it. Companies with a p/e of 100 cannot miss at all, ever!
In reality, net income did almost double to $372M vs. $204M bringing the year’s total to $5.3 per share, still a full 15% lower than analyst over-inflated expectations. Google had previously doubled every single prior quarter so an 82% increase in Q4 just does not cut it!
Sales growth also slowed in the 4th quarter (there was no way to keep up the initial pace) to 23% above Q3 vs. a 30% growth rate last year.
What gets me most about this is how the Google guys can have a miss that wide and not have given any kind of warning. The biggest damage they will suffer from this is a future lack of trust from the analysts and shareholders who (although it was their own damn fault) will feel betrayed by the boys who sold Billions of dollars worth of their own stock to people who were left holding this very, very expensive bag!
So, let’s summarize:
- Missed Earnings – check
- Missed Revenues – check
- Fighting with US government – check
- Bowing to pressure by Chinese government – check
- Click fraud concerns snowballing – check
- Owners about to be crucified by the press – check
Google may be moving into what Cramer calls “a house of pain” for the near future, after which it will be a great buying opportunity. Google is not in the S&P 500 which means a lot of funds may feel free (or find it necessary) to dump big stakes in the stock if it slips below key thresholds ($370ish) so there is a possibility of a cascading drop in price down to $330 or lower if the worst case plays out.
I will update later to see if it can be played today but we need to get a feel on the overall market impact first. If the market can shrug this off (and I think it can) we will be in great shape. Either way, this is probably the best test of real market sentiment we have had in years.
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Another test to the market’s (and to all American’s) tolerance was Bush’s State of the Union address.
Behind the scenes at Bush’s speech yesterday they arrested a protestor (who was properly invited by her congresswoman) for wearing an anti-war T-shirt to congress last night. Rather than just asking the woman to leave they actually handcuffed her and took her into custody even though I am told she offered no resistance. It will be interesting to see what they charge her with (or perhaps she will end up in Guantanamo Bay!).
The most telling statement Bush made yesterday was a classic piece of Orwellian doublespeak: “The road to victory is the road that will take our troops home.” Wow! So that’s going to be victory now? They used to call that retreat… While I am glad that we are finally going to extract ourselves from that disaster, let’s just try to keep the bar a little higher for the word victory.
Bush is wrong/misleading about one thing. America is not addicted to oil, we are addicted to energy. The average American consumes 25 barrels of oil vs. 11 for the average European or Japanese and just 1 for the average Chinese or African. We don’t care how our big screen TVs are powered, as long as they can run 8 hours a day!
I also loved the fact that now he wants to put together a panel to study this baby boomer turning 60 thing. Wow George, way to get on top of the problem! Who could have seen that coming any sooner than the year they start turning 60? John Kerry must be turning over in his grave. What? He’s still alive? You sure can’t tell by looking at him…
Speaking of Kerry, isn’t it ironic that what Bush said about Hammas applies to himself: “The election is not a mandate, but a repudiation of your opposition.”
There was nothing in the address to move the markets, other than perhaps alternative energy, but I think it was enough of a political failure that there is now an increased chance that the GOP will lose the house in the next election. The markets tend to do much better with a divided congress (less chance to screw up)!
