Options Trade – Google Inc. (GOOG) Wednesday, October 17, 2012

”I am going to GOOGLE that!”

Google Q3 Earnings Should Top Consensus!

**OPTION TRADE: Buy the GOOG Jan 2013 850.000 call (GOOG130119C00850000) at or under $6.70, good for the day. Place a protective stop limit at $2.80 and a pre-determined sell at $10.50.

by Ian Harvey

October 17, 2012

Introduction

It might feel like Google has been around forever, but maybe that's because the company has managed to influence every aspect of our digital life. Google has been furthering its reach in recent years, expanding from just a search engine to the maker of the popular Android operating system for smartphones.

Google Inc. (NASDAQ: GOOG: 744.7, 4.61) is expected to report upbeat earnings when it reports its third quarter numbers on Oct.18. Analysts are expecting the company to post an 8.4% rise in earnings to $10.54 per share. Revenue is seen jumping 58% to $11.87 billion.

Google Inc. (Google) is a global technology company focused on improving the ways people connect with information. The Company generates revenue primarily by delivering online advertising. As of December 31, 2011, the Company’s business was focused on areas, such as search, advertising, operating systems and platforms, and enterprise. Businesses use its AdWords program to promote their products and services with targeted advertising. In addition, the third parties that comprise the Google Network use its AdSense program to deliver relevant advertisements that generate revenue. In June 2011, it launched Google+. In September 2011, the Company acquired Zagat. In May 2012, Google acquired Motorola Mobility Holdings, Inc. As of January 2012, over 90 million people had joined Google+. In April 2011, the Company acquired PushLife. On July 31, 2012, it acquired marketing start-up Wildfire. In September 2012, it acquired VirusTotal and Nik Software.

Shares of Google traded up 0.17% during mid-day trading on Tuesday, hitting $742.21. Google has a one year low of $556.52 and a one year high of $774.38. The company has a market cap of $242.7 billion and a P/E ratio of 21.97.

Earnings Expectations

Google last issued its quarterly earnings data on Thursday, July 19th. The company reported $10.12 earnings per share (EPS) for the quarter, beating the consensus estimate of $10.09 by $0.03. The company’s revenue for the quarter was up 39.0% on a year-over-year basis. On average, analysts predict that Google will post $42.49 earnings per share for the current fiscal year.

For this quarter’s report Wall Street analysts are looking for earnings of $10.54 a share, according to analysts polled by Thomson Reuters. The consensus estimate represents an 8.4 percent increase from last year when GOOG earned $9.72 a share.

Google will look to maintain its momentum of above-consensus earnings in the past two quarters. The search giant's earnings have managed to top the Street view thrice in the preceding four quarters. The consensus estimate has dropped from $10.77 to the current estimate of $10.54 within the last three months.

Quarterly revenues are expected to be $11.87 billion, a 58 percent growth from last year. In the same quarter last year, Google generated sales of $7.51 billion. The company has delivered double-digit revenue growth in the past four quarters, with average revenue growth of 29.6 percent.

Investors would be looking for key metrics such as advertising revenues, cost per click (CPC) and would be eager to know how the Motorola Mobility unit is performing.

For the second quarter, Mountain View, California-based Google reported net income of $2.79 billion, or $8.42 a share, compared with $2.51 billion, or $7.68 a share, last year. Excluding items, it earned $10.12 a share, which topped the Street view of $10.04 per share for the quarter. Consolidated revenues for the quarter rose 35 percent to $12.21 billion.

Google's mainstay advertising revenues for the quarter were up 21 percent. Aggregate paid clicks, which include clicks related to ads served on Google sites as well as sites of its AdSense partners, grew 42 percent and average cost-per-click, which includes clicks related to ads served on Google sites and the sites of AdSense partners, fell 16 percent.

During the third quarter, CPC pricing appears to be improving, with total spending accelerating, and a larger sample size is supportive of strong results.

Google has been trying to cut costs at its Motorola Mobility unit. In mid-August, Google said it plans to cut about 4,000 jobs and close certain facilities at Motorola in an effort to return the loss making mobile devices unit to profitability. Google has also reportedly shaken up Motorola management by cutting 40 percent of its vice presidents.

The planned restructuring actions mean that Google would incur total charges to the tune of about $390 million. Of these, $300 million in severance-related charges will be recognized in the third quarter of 2012.

Investors will watch for an update on restructuring actions at Motorola. The search giant hints that it continues to evaluate further

restructuring actions at the unit.

Analysts Opinions

Wall Street has a bullish opinion on Google shares as 35 out of the 42 analysts covering the stock has a rating of "strong buy" or "buy," while the remaining seven of them recommend "hold."

Google’s stock had its “outperform” rating reaffirmed by Macquarie in a research note issued on Tuesday. They currently have a $795.00 price target on the stock.

Other equities research analysts have also recently issued reports about the stock. Analysts at Piper Jaffray raised their price target on shares of Google to $834.00 in a research note to investors on Monday. Separately, analysts at Oppenheimer raised their price target on shares of Google from $752.00 to $800.00 in a research note to investors on Monday. They now have an “outperform” rating on the stock. Finally, analysts at JPMorgan Chase raised their price target on shares of Google from $670.00 to $850.00 in a research note to investors on Friday. They now have an “overweight” rating on the stock.

Conclusion

Google is the world's leading search engine and the company just celebrated its 14th birthday. After hitting its old all-time high of $747 a share nearly five years ago and topping out, the shares fell as low as $260 in the midst of the credit crisis. Since then, the shares have slowly climbed their way back to new all-time highs, and I believe there is more upside. Analysts have been raising their price targets on GOOG to $850 from $740.

The company is expected to increase its ad spending to around 20% in the third quarter, and new efforts to monetize Google Maps will help boost revenue. YouTube is growing, Android is dominating, search isn't going anywhere (the amount of resources and skill required to really succeed in Search are very significant, as Yahoo! (YHOO) and Bing's limited results to date demonstrate), display is growing, and Facebook (FB) did not turn out to be the threat people thought it might be.

The key with GOOG is mobile monetization and the success the company has had with it. Facebook is miserable at it and we all know what that has done to the stock price and market cap in that name. Not only has GOOG proved its superiority with mobile monetization, it showed improved cost per click metrics last quarter, beating consensus expectations that could also continue and provide further momentum to the stock price.

Therefore, with the drop in share price, and based on the facts above the following options trade is recommended…..


**OPTION TRADE: Buy the GOOG Jan 2013 850.000 call (GOOG130119C00850000) at or under $6.70, good for the day. Place a protective stop limit at $2.80 and a pre-determined sell at $10.50.



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