Can Google Keep Meeting Its High Expectations?

With shares of Google (NASDAQ:GOOG)(NASDAQ:GOOGL) trading around $589, is GOOG an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Google is a global technology company focused on improving the ways people engage with information. The business is based on the following areas: search, advertising, operating systems and platforms, and enterprise. The company generates revenue primarily by delivering online advertising. Google is a search giant with most of the market share largely because of its execution and delivery. An increasing number of consumers and companies worldwide are coming online, which will surely increase the amount of eyes on the company’s ads and, in turn, advertising revenue. At this rate, look for Google to remain on top of the Internet world.

Google is among several technology companies considering a plan that uses pay phone locations to give New Yorkers free wireless Internet access. The Mountain View, California-based company was among more than 50 attendees at an informational meeting in May for the project, according to a request for proposals from the city’s Department of Information Technology and Telecommunications. The search provider is stepping up efforts to provide digital access in the U.S. and around the world as it seeks to get more consumers on the Internet, benefiting its own user and ad services. The company, which is working toward rolling out broadband services in several U.S. cities, already provides wireless access in Mountain View and New York’s Chelsea neighborhood, where it has an office.

T = Technicals on the Stock Chart Are Strong

Google stock has been moving higher over the last couple of months. However, the stock is currently pulling back and may need time to consolidate. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Google is trading above its rising key averages, which signals neutral to bullish price action in the near-term.

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Google options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Google options

18.88%

3%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of Monday, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Google’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Google look like and more importantly, how did the markets like these numbers?

2014 Q2

2014 Q1

2013 Q4

2013 Q3

Earnings Growth (Y-O-Y)

4.5%

-49.31%

5%

21.08%

Revenue Growth (Y-O-Y)

13.19%

10.38%

16.92%

11.94%

Earnings Reaction

3.72%

-3.67%

4.01%

13.79%

Google has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Google’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Google stock done relative to its peers – Yahoo (NASDAQ:YHOO), Microsoft (NASDAQ:MSFT), and Baidu (NASDAQ:BIDU) — and sector?

Google

Yahoo

Microsoft

Baidu

Sector

Year-to-Date Return

6.29%

-17.57%

19.46%

7.46%

4.91%

Google has been an average performer, year-to-date.

Conclusion

Google is an Internet giant that provides valuable search and advertising services to a growing user base worldwide. The company is considering a plan that uses pay phone locations to give New Yorkers free wireless Internet access. The stock has been moving higher over the last couple of months but is currently pulling back. Over the last four quarters, earnings and revenues have been increasing, which has left investors pleased. Relative to its strong peers and sector, Google has been an average year-to-date performer. Look for Google to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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