Is Google Ready to Move Higher?

With shares of Google (NASDAQ:GOOG) trading around $885, 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 focused 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 getting close to reaching a settlement with European regulators over its search business, which had been deemed by the European Commission as being anti-competitive. Google has offered concessions that will make rivals’ products easier to see in a Google search and allow advertisers to post ads on other search engine’s sites as well. European Commission head Joaquin Alumnia has said that he approves of Google’s concessions, but that Google’s rivals should have a chance to approve them as well, according to the New York Times.

T = Technicals on the Stock Chart Are Mixed

Google stock has been exploding to the upside in recent years. The stock has been trading sideways as it digests gains from a recent bullish run. 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 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

26.16%

96%

95%

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

Put IV Skew

Call IV Skew

October Options

Flat

Average

November 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 very 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?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

-5.53%

13.60%

17.06%

-21.61%

Revenue Growth (Y-O-Y)

15.52%

31.23%

24.87%

45.07%

Earnings Reaction

-1.55%

4.43%

5.49%

-1.90%

Google has seen mixed earnings and rising revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about 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

25.00%

69.10%

24.92%

55.63%

40.32%

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. Its search business has been deemed by the European Commission as being anti-competitive so a settlement is in the works. The stock has been flying to the upside but is now trading sideways as it digests gains from a recent run. Over the last four quarters, earnings have been mixed while revenues have been rising, however, investors have had conflicting feelings about recent earnings announcements. Relative to its strong peers and sector, Google has been a weak year-to-date performer. WAIT AND SEE if Google can breakout of this consolidation range.

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