Is Google a Healthy Investment?

With shares of Google (NASDAQ:GOOG) trading around $504, 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 announced some big improvements to the Google Maps app for Android and Apple’s (NASDAQ:AAPL) iOS on Tuesday, including integration with the popular ride app Uber. The latest set of updates includes new options that will improve the Google Maps experience for both drivers and users of public transportation.  The driving directions in Google Maps will now include lane guidance, with the app telling you which lane you should be in based on your route. This is a much-needed addition to the Maps experience, as it is often difficult to look ahead and see which lane you should be in while driving, especially on a complicated or traffic-filled route. There is also a new offline option that allows you to save maps for offline use under a specific name, so if you find yourself without phone service, you can still access a saved map. If a Google Maps user also has the Uber app installed on his or her device, then Uber will pop up as a transportation option alongside walking and driving directions. Clicking on the Uber option will transfer users directly into the Uber app.

It was revealed that Google invested in the high-end taxi service last year, and since then, the app has grown from 35 to 70 cities and has unveiled cheaper options for those looking to travel frugally. Uber works by allowing users to request ride service from a location within a city that Uber serves and complete the transaction using credit card information stored in the app. Different cars can be chosen based on pricing. Uber has become a popular ride option, as it is simpler, frequently more reliable, and easier to find than traditional taxis. Uber isn’t the only improvement to Google Maps for users of public transportation. The service has stepped up the amount of public transportation options it has access to and added the ability to search for the “last train home” while overall improving its transit accuracy.

T = Technicals on the Stock Chart Are Weak

Google stock has struggled to make significant progress. The stock is currently trading at lows for the year and may need time to stabilize. 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 below its rising key averages which signal neutral to bearish 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

21.98%

13%

10%

What does this mean? This means that investors or traders are buying a 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

Steep

Average

July Options

Steep

Average

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

-9.46%

-4.27%

-1.60%

-0.73%

-3.01%

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 company announced some big improvements to the Google Maps app for Android and Apple’s iOS on Tuesday. The stock has struggled to make significant progress and is currently trading at lows for the year. 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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