Google Thoughts

Before we do anything else I want to be clear that nothing should be purchased if the market goes down tomorrow! DNA is down 1.5% in after hours trading on earnings that could not be better so if this one can’t go up, there may be no hope for Google either. ==================================== As we get nearer and nearer to earnings on Google I am (and I am ashamed to admit this) warming up to the company! While I still think the company is being run like a dot com bubble get rich quick scheme for insiders I am starting to think that, much like old-time survivor Yahoo, there is just too much of a real company built on too great of a core concept to mess up. I could go on about all the good things Google has going for it and its potential etc. but we’ve done that before and made a lot of money last fall when no one believed it would hit $300. After riding it up to $450 we bailed at just the right time and we caught another nice upswing last month so, on the whole, I’ve always kind of liked the stock – just not at $450 plus per share. But now we have to think about whether we really believe that giving $400 to Google for one share of stock is better than buying 2 shares of Microsoft, 2 shares of TXN, 2 shares of GE a share of PD and a share of NEM. What is my downside risk? For Google, about 25% ($300). The others maybe 20% (GE and TXN lost 10$ the week of 1/17). What’s my upside? For Google, possible $500 (25%) on good earnings. The others are all looking toppy with the markets. Also, Google doesn’t seem to care what the rest of the market is doing: http://finance.yahoo.com/q/bc?s=GOOG&t=6m&l=on&z=m&q=l&c=%5Edji Last quarter, Google missed by a stunning 22 cents and the stock plunged 10% in one day and another 15% in the next 2 weeks. It has since recovered all but 5% of it but is still far shy of the $475 high it hit after a beat on the 3rd quarter. The sole reason for the miss last quarter was 24 cents worth of taxes that the company was forced to adjust in the 4th quarter to cover a whole year of international taxes they didn’t allow for. While many screamed bloody murder about this, I can give them a bye and call it a rookie mistake (how many of you are experts in international accounting regulations?). What I have decided is most telling about this is that, if you add back the .24 then the analyst consensus (and there are 39 of them) was pretty much right on the money. In the past 90 days, those analysts have raised their estimates 2 cents to $1.99. But the company has actually increased Q1 revenue over Q4 by an average of 30% for the past 3 years. A 20% increase over Q4 would give them $2.25Bn in revenues, much higher than the street is looking for and still in line with the much lower sequential growth Reyes hinted at. If expenses remain in line and taxes normalize at 30%, we could see an additional $300M drop to the bottom line. That would push Google well over $2 a share and blow people away with what will look to be a very possible $10 per share year. That would make Google well worth $600 per share by year’s end (providing they keep it up of course) and would certainly get them to at least $490 in May. So, given this possibility I think we need to take advantage of any Google weakness to work our way into a spread but first we need to take a day to see which way the wind is blowing. This will be a 10x spread on both sides and needs to be done slowly. If I were doing it today (Weds) I would do the following: Offer $2 for X May $490s (I already have the $500s) Offer $2 for X May $330 puts Depending on which one gets filled first we have to make adjustments. Before last earning, Google got killed on Jan 17th when Yahoo announced disappointing results. The stock dropped from $475 down to $395 in 6 sessions. The stock recovered 60 points in the next 2 sessions but then got clobbered by its own miss 3 sessions later. The reality was that Google was indeed taking market share from Yahoo but you can’t fight the sector (as DNA is finding out!). Yahoo has earnings on the 18th, 2 days before Google! This time estimates and expectations for Yahoo are extremely low, down 35% from last quarter. If Yahoo beats on Tuesday both stocks will fly up and another beat from Google will put it on a real tear while a double miss can knock 30% off both stocks.