Is Google a Good Portfolio Play?

With shares of Google (NASDAQ:GOOG) trading around $528, 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.

Internet users in Europe have no need to fear that a news story from twenty years ago or a decade old MySpace photo they find when they use Google search to see what comes up on them. The European Union Court of Justice, essentially the Supreme Court of the European Union, ruled that users have the right to ask that they be removed from search results. The document issued by the court on the decision says the individuals have the right to contact Google and have search results removed at their request. “Thus, if, following a search made on the basis of a person’s name, the list of results displays a link to a web page which contains information on the person in question, that data subject may approach the operator directly and, where the operator does not grant his request, bring the matter before the competent authorities in order to obtain, under certain conditions, the removal of that link from the list of results.”

Google was not happy with the decision, calling it censorship. A representative told CNET it was a disappointment. “This is a disappointing ruling for search engines and online publishers in general. We are very surprised that it differs so dramatically from the Advocate General’s opinion and the warnings and consequences that he spelled out. We now need to take time to analyze the implications,” said a Google representative. BBC reported that campaign group Index on Censorship said the decision “violates the fundamental principles of freedom of expression,” in its coverage of the court decision. The court acknowledges that the conflict in the case was an individual’s right to privacy versus the public’s need for information. As European courts tend to favor privacy rights or as the court called it in this case, “right to be forgotten,” it is not surprising which side won the case. That concept was also introduced by the European Commission in a set of potential data privacy laws in 2012 reports CNET.

T = Technicals on the Stock Chart are Weak

Google stock has been pulling back in recent times. The stock is currently trading sideways and may need time to consolidate before heading higher. 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 between its rising key averages which signal neutral 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

14.53%

0%

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

June Options

Average

Average

July Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral 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 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 = Weak 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

-5.29%

-2.78%

2.44%

4.13%

-1.37%

Google has been a poor relative performer, year-to-date.

Conclusion

Google is an Internet giant that provides valuable search and advertising services to a growing user base worldwide. The European Union Court of Justice, essentially the Supreme Court of the European Union, ruled that users have the right to ask that they be removed from search results. The stock has been pulling back in recent times and is currently trading sideways. 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 a weak year-to-date performer. WAIT AND SEE what Google does next.

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