The past two weeks, Google has demonstrated why the company has performed so well for many years: innovation.
The company captured media and tech watchers’ imagination when it was revealed that it had two mystery barges on the West Coast. Were they large, floating data centers? It turned out that they are actually party barges for Google Glass.
But what was on the barges was less important than what it showed. And long-term investors must like what they see. Over the past month, the company gapped much higher following a strong earnings report – finally topping that $1,000 per share mark. On Tuesday, Google closed at $1,011.78.
However, even for short-term traders (which is a timeframe that Tradespoon’s algorithm operates on), there is opportunity in Google. The stock has shown support around the $850 level, while resistance is near highs at $1,030. Technically, the stock is trading above the 50-Day Moving Average ($948.01) and well above the 200-Day Moving Average ($899.26).
Google is up more than 42 percent year-to-date. After hitting $920 per share, the stock contracted and traded sideways, which was a temporary pause in the bullish trend. However, the gap up on October 18 is a sign of investors’ confidence in the stock.
Currently, there is a bearish sign on the MACD indicator (purple circle) and the stock is struggling to stay above the psychological level above $1,000. However, unless the stock closes below $900, the original bullish trend is still valid.
A LOOK AT FUNDAMENTALS
After finding strong technicals, we see the short-term bullish trend is confirmed in GOOG’s fundamentals as well. The company reported that it earned $2.970 billion, or $8.90 basic earnings per share for Q3 2013. That’s up from $2.176 billion, or $6.64 basic earnings per share for the same quarter last year. Revenues for the third quarter were $14.893 billion, up from $13.304 billion for the same quarter last year.
All of Google’s segments, except for Motorola, were up in comparison to the same quarter last year. Namely, Google Websites, accounting for more than 63 percent of total revenue, was up by 21.57 percent, primarily due to increase in advertisement revenue. What is noticeable is that Aggregate paid clicks on Google websites and Google Network Members’ websites increased approximately 26 percent from the third quarter of 2012 to the third quarter of 2013, and in the same time Average cost-per-click on Google websites and Google Network Members’ websites decreased approximately 8 percent.
Google also increased operating margin, which gained to 23.1 percent compared to 20.6 percent for the same quarter last year. GOOG forecasted EPS for the fourth quarter of 2013 ending December 31 are from $9.26 to $11.58, compared to $8.62 in the fourth quarter of 2012.
Google’s trailing price-to-earnings ratio is at 27.65, below the industry average of 31.56, but above the S&P 500 average of 18.71. GOOG’s current Price/Sales of 5.92 is above the average of its industry of 2.89.
When we look at Google compared to its main competitors, Google has lowest gross margin, while the company’s operating margin is also lagging (only outpacing YHOO). The quarterly revenue growth of the company is better than most of the competitors, but still below the industry average. The stock trades at a more or less leveled P/E and P/S ratios with the main competitors. The company has the lowest (best) PEG ratio of all the competitors, which shows that investors are expecting higher growth in future company’s earnings.
The stock is currently trading below its intrinsic value of $1,169.11, suggesting that the stock is currently undervalued at these levels.
DEBIT CALL STRATEGY
Technical and fundamental indicators both show short-term bullish signals for GOOG. Investors should consider the following debit call spread: Buy December 2013 $1015 calls and sell the December 2013 $1020 Calls for a net debit of $2.40. Between now and expiration in a month, we believe the spread price can reach $4.90. By selling the higher strike price, traders are able to collect some premium to offset the price of the long calls.
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