I'm getting a little more enthusiastic!
AAPL has it's "Let's Rock" event today and expectations are fairly low so there is a nice possibility of an upside surprise. GOOG remains under constant attack as the WSJ goes with they hypeline: "Lawyer Picked for Possible Google Suit" to describe an article in which the DOJ hired former Chief Sandy Litvack to CONSULT on their ongoing investigation into the advertising deal GOOG made with YHOO. In the original AP story, it says the DOJ: "had made no decision on whether to challenge the partnership, according to the source" but the WSJ says: "Mr. Litvack's hiring is the strongest signal yet that the U.S. is preparing to take court action against Google and its search-advertising deal with Yahoo Inc. The two companies combined would account for more than 80% of U.S. online-search ads."
The AP says "Yahoo said it was confident that in the end the Justice Department would decide that its deal with Google was legal. "We have been informed that the Justice Department, as they sometimes do, is seeking advice from an outside consultant, but that we should read nothing into that fact," the search firm said in a statement." The WSJ says: "For weeks, U.S. lawyers have been deposing witnesses and issuing subpoenas for documents to support a challenge to the deal, lawyers close to the review said. Such efforts don't always mean a case will be brought, however." Wow – what a difference a little spin can make on a story!
The two companies have VOLUNTARILY delayed the closing of the deal in order to get the DOJ comfortable that the deal they have struck is not anti-competitive. Microsoft has objected to the deal, saying it would unfairly foreclose competition on the Web. In Senate hearings in July, Microsoft's general counsel, Brad Smith, testified that "if search is the gateway to the Internet, and most people believe that it is, this deal will put Google in position to own that gateway and the information that flows through it." LOL – said the guy that controls the operating system on 90% of all computers on the planet!
Speaking of Google versus Microsoft – It was Google's 10th birthday last week and there was a great comparison of GOOG, who are currently valued at $132Bn and MSFT, who have a market cap of $238Bn and how they stack up against each other. Most striking to me is Google's revenues per employee of $1M versus Microsoft's $672,000. One of the knocks on Google is that they are overhiring but, at $1M per employee, I'd say more is indeed better! Aside from MSFT, only IBM and APPL have a greater valuation than Google in tech land and let's not forget the most important number: WITHOUT the Yahoo deal, Google searches were used 48.7Bn times in July versus 2.3Bn done on Microsoft's platform (and IE is still the default browser on Windows). Microsoft is terrified of Google. Google's new browser, "Chrome" is looking like a winner and that is a huge threat to MSFT's $60Bn annual revenue stream as more and more computers are turning into Internet appliances.
Google is the future, Microsoft is the past. Both MSFT and ADBE have been hit hard since Chrome was unveiled last week. Google is working on so many things we hardly even notice major events like they just finalized a massive deal with Newspapers to archive microfiche and make it searchable. Had they started a company to just do that in 1999 they would have gotten a Billion dollars! DESPITE the slowing economy, internet advertising rose 20% in Q2 with display ad spending lagging gains in search adds (projected to hit $10.4 Bn) but still projected to hit $5.2Bn this year vs. $4.5Bn last year. That is what the Yahoo partnership will do for Google, who dominate search ads and will take over the leadership in display ads by running Yahoos back end. So let's do that math: GOOG with a 70% market share at $15.6Bn this year (up $2.5Bn from last year) and the $3Bn+ growth projected next year goes 70% to Google ($2.1Bn) which drops 25% of revenues down to net profits ($500Bn). That right there is a better than 10% increase in net profits just in their core business, quite a bargain for a stock that was at $700 last fall, when revenues were 25% lower!
As media analyst, Daine Mermigas said last week Google's checkmate (taking over the market) was three moves ago. The only real potential competitor they have left is Microsoft who, ironically, have to beg for the DOJ to help them stop Google from making them irrelevant – as they did to so many of their competitors in the past. We have Google as a core long-term holding and we've been accumulating on the way down. You don't need to spend $420 a share to hope GOOG goes back to $700 – you can buy the Jan 2010 $400s for $93.50, where a move to $700 will give you a nice triple. While you wait, you can sell the October $490s for $5.55, which may not seem like much but you wouldn't have to give your caller his $5.55 back until Google hits $495.55, which puts you in the money with a small profit and, if you sell them every month for that price, you will collect $83.25 between now and Jan 2010, meaning your break-even price on Google would be reduced to $410.25 with everything over that profit on the $10.25 you would have remaining at risk.
This trade is not riskless, of course. Had you followed that logic with the 2010 $600s in May at $110, you would only have $28.20 in value left and the $20 or so you would have sold in premium, a 67% loss but a lot better off financially than if you had held onto 100 shares of GOOG that dropped $200 each. Options do not eliminate risk, they mitigate it but, at times like this, the leverage they provide to allow you to get into a great stock cheaply is very compelling! Google may flatline for a while but if you pick up the 2010 $400s for $98, plan to sell the $490 calls for $5.50 and hold cash on the side to DD at $28.20 if Google drops to $200, you could be sitting on a nice chunk of Google 2010 $400 calls with an average entry of $60.85 even if Google hits $200. It's always about risk/reward but, other than BA, I think Google is the market's best deal at the moment.
