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Thursday, March 28, 2024

GOOG: To spread or not to spread?

I worked my way into a heavy helping of GOOG $370 puts today as I am more and more convinced that, not only has the current run-up been totally manipulated, but that the manipulators are running out of ammo and time.

As the stock languished around $390 I was strongly considering the spread of the $410s for $5.20 and the $470 puts for $6.60 as it does seem unlikely that the stock will avoid a $20 move in one direction or the other for the rest of the month.

So as Google touched $388 around 11am, I racked up order after order of the $370 puts, averaging around $6.50 for the bunch but then I waited to see if the calls would come down a bit and as they did and I sat there with my finger on the buy trigger I JUST COULDN’T DO IT!

I started thinking, “What the hell am I doing?” Do I really believe this stock will pop back up to $420+ in the next few weeks? I just don’t see it. I looked on the Yahoo Google Message board and found no intelligent support for a price rise. Checking the technicals, the stock looks pretty overbought at the moment but it was the fundamentals that killed the trade.

Google is a great company with a great idea and a great product but that certainly hasn’t been enough for Yahoo, who beat them by 10 years nor did it stop Microsoft (who have 2Bn more daily users than Google) from languishing at 1/2 their peaks for the past 5 years.

Heading into Thursday’s analyst meeting Google will need to justify a $388 (at the moment) price tag. The presumption in the 75x p/e is that the company will earn close to $9 a share this year, bringing the year end ratio down to about 32. There are 30 analysts covering this stock and only 1 has a sell rating on the stock while just 8 have a hold. The other 21 analysts are all currently telling people to buy the stock.

$9 per share is more than 160% of this 2005’s earnings but revenue estimates by the same analysts are for only $6.5Bn in revenues, just $400M (6%) more than 2005. You can scratch your head all day and this one still won’t make any sense!

http://finance.yahoo.com/q/ae?s=GOOG

To get from $3Bn (2004) to $6Bn (2005) (100%) Google incurred the following changes:

Cost of revenue: $1.4Bn to $2.6Bn (up 80%)
G&A: $660M to $975M (up 50%)
R&D: $225M to $483M (up 115%)
Income Tax: $251M to $676M (up 150%)

Yet next year, we are supposed to believe that the company (which gives no guidance of its own) will add little or no revenue, but will actually cut the above costs by greater than 50%.

The following year, revenues are expected to climb another 50% to $9.2Bn and earnings are supposed to rise 50% as well to a full $12 per share ($7Bn). This would mean that by the end of 2007, Google will have more earnings than Yahoo has sales in total!

Essentially, to buy into these numbers, you need to think that Google will not only take a 100% share of the market in the search sector but that they will do it at 80% profit margins.

In order to actually make $4Bn (pre-tax) this year, Google will have to generate approximately $12Bn in sales – and that’s assuming they keep costs down. We have some concerns there as well:

  • They have been hiring like crazy and paying top dollar for talent (more than Microsoft was willing to pay).
  • They are paying AOL $1Bn in a content deal
  • Competitors won’t give up their clients without a fight, probably leading to discounts
  • Businesses are not likely to overcommit to one company, even Google!

Analysts hate to say they’re wrong – unless they have someone to blame! Look for Thursday’s meeting to have a lot of finger pointing and expect quite a few estimates to change on Monday. At last year’s analyst meeting, Google’s executive chef spoke to the analysts but the CFO did not (sort of an FU slap at the analysts), expect the boys to toe the line somewhat this year or they may lose another few Billion of net worth on Monday!

 

 

So here I am with my heart in my throat, hoping my puts will pay off. On the whole, the spread is a smarter, safer play into the conference because, good or bad, it is unlikely the stock will stay at $390 for 3 weeks but I just can’t imagine what they are going to say that will justify the $15Bn that has been added to this company’s value in the past 7 sessions.

We’ll have a better idea of how I’m doing at 4pm but I thought I’d publish this now so you can get an idea of the heartache of holding an open position like this!

Wish me luck!

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