Is Google Enticing After Recent Headlines?

With shares of Google (NASDAQ:GOOG) trading around $1,217, 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’s new investment arm is buying a minority stake in Auction.com, the largest U.S. online real estate auction firm, for $50 million. The investment by Google Capital, which expects to spend about $300 million this year to back late-stage companies, is the first in a real estate venture for the unit of the Mountain View, California-based Internet search firm. The deal values Auction.com at $1.2 billion, the Irvine, California-based company said today in a statement. “Like EBay (NASDAQ:EBAY) kind of drove transparency and created a marketplace for hard-to-find items, Auction.com is creating transparency in part of the real estate market,” David Lawee, head of Google Capital, founded last year, said in a telephone interview. “Here, you can go on to a site and see thousands of properties that are listed for sale that would be great investment opportunities.”

Auction.com, which sold $7 billion in real estate online last year, uses countdown clocks similar to those on EBay Inc.’s website to broker the sale of properties and non-performing loans. It has auctioned $26 billion of assets since 2007, diversifying from foreclosed homes sold on courthouse steps to selling luxury properties, office buildings and European real estate. The Google investment will help Auction.com expand and diversify its technology, including offering more services for mobile customers, according to Jeff Frieden, the company’s co-founder and chief executive officer.“It’s a very strategic partnership,” Frieden said in a phone interview. “It’s about a lot more than just the money.”

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 set to continue this path. 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

21.40%

46%

43%

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

April Options

Flat

Average

May 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

8.83%

-2.42%

1.55%

-2.25%

2.42%

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’s new investment arm is buying a minority stake in Auction.com for $50 million. 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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