Is Google a Buy Near All Time Highs?

With shares of Google (NASDAQ:GOOG) trading around $1,220, 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 lobbying against several bills being pursued by lawmakers that will prohibit the use of Google Glass while driving, according to an exclusive report from Reuters. Eight states are considering legislation that will limit the use of wearables like Glass while driving and Google is lobbying officials in at least three states to put a stop to the laws. Google Glass is essentially a tiny computer screen in the corner of a glasses lens. While wearable technology is thought to represent the next big technology shift, much is still unknown about how the rising prevalence of devices like smart glasses and smartwatches will affect our day-to-day lives. Many are worried that devices like Glass will cause drivers to be easily distracted, leading to more automobile accidents. There are already laws prohibiting the use of smartphones while driving and large campaigns to educate the public about the dangers of texting and driving. According to Distraction.gov, in 2012 there were 3,328 deaths caused by distracted driving accidents.

T = Technicals on the Stock Chart Are Strong

Google stock has been exploding to the upside in the past several years. The stock is currently trading near all time highs 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

20.91%

30%

28%

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

Put IV Skew

Call IV Skew

March Options

Flat

Average

April 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 minimal 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?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

5%

21.08%

-5.53%

13.6%

Revenue Growth (Y-O-Y)

16.92%

11.94%

15.52%

31.23%

Earnings Reaction

4.01%

13.79%

-1.55%

4.43%

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 = Excellent 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

8.81%

-5.56%

0.29%

-0.54%

1.75%

Google has been a relative performance leader, 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 lobbying against several bills being pursued by lawmakers that will prohibit the use of Google Glass while driving. The stock has been exploding higher in recent years and is currently trading near all time highs. Over the last four quarters, earnings and revenues have been rising, which has left investors pleased about recent earnings announcements. Relative to its strong peers and sector, Google has been a year-to-date performance leader. Look for Google to continue to OUTPERFORM.

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