Will Google Head Higher After Recent Headlines?

With shares of Google (NASDAQ:GOOG)(NASDAQ:GOOGL) trading around $586, 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.

Diabetics may be able to track their blood sugar using contact lenses in the next few years thanks to Google’s newest deal. Google’s smart contact lens project is getting a boost from a new deal with Novartis (NYSE:NVS). Google’s research division, Google[x], will provide the technology behind the smart contact lens to Novartis’s Alcon eye-care division, which will license the technology. The partnership will also have the two companies working together to refine the technology so that they can eventually progress to the testing phase. Once it survives that phase and gets the needed approvals from the U.S. Food and Drug Administration, then it will eventually make it to the market.

In some ways, the deal is the ideal match of technology and medical knowledge. Google specializes in devices and the small sensors that make the smart contact lenses possible. Novartis brings its medical and treatment knowledge to the table. The Wall Street Journal reported that analysts like the deal from a business perspective since Alcon is a leader in the contact lens market. Google described how its smart contact lenses would work in a January blog post. Currently, how the lenses will work is through the use of sensors between two layers of contact material. The sensor will detect blood glucose levels, an important indicator of health for diabetics. The lenses may be modified as a result of this partnership to improve them or to use them to monitor other conditions. Novartis division Alcon also wants to apply the technology to treating the condition presbyopia, an eye condition that causes people to lose the ability to focus. It is currently treated with glasses.

The company sees the potential to use Google’s smart contact lens technology for a wide variety of diseases and conditions. “Alcon and Google have a deep and common passion for innovation,” said Jeff George, division head of Alcon, in a press release announcing the partnership. “By combining Alcon’s leadership in eye care and expertise in contact lenses and intraocular lenses with Google’s innovative ‘smart lens’ technology and groundbreaking speed in research, we aim to unlock a new frontier to jointly address the unmet medical needs of millions of eye care patients around the world.”

T = Technicals on the Stock Chart Are Strong

Google stock has been moving higher over the last couple of months. The stock is currently surging higher and looks poised to continue. 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 signal neutral to bullish price action in the near-term.

GOOG

(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

26.16%

43%

40%

What does this mean? This means that investors or traders are buying a significant 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 today, 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 significant 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 Mixed 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 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-49.31%

5%

21.08%

-5.53%

Revenue Growth (Y-O-Y)

10.38%

16.92%

11.94%

15.52%

Earnings Reaction

-3.67%

4.01%

13.79%

-1.55%

Google has seen mixed earnings and increasing 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), Baidu (NASDAQ:BIDU), and sector?

Google

Yahoo

Microsoft

Baidu

Sector

Year-to-Date Return

4.46%

-11.93%

13.47%

6.74%

4.18%

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 stock has been moving higher over the last couple of months and looks poised to continue. Over the last four quarters, earnings have been mixed while 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. WAIT AND SEE what Google does next.

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

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