Stock of the Week: Google (GOOG)

Oct 20, 2013 -

Google Gaps Huge Up After Q3 Earnings


When a company tops $300B in market cap, you start to wonder if there is more room for growth. At some point the company will reach its peak and growth will start to slow. After all, we see more companies grow from $5 million to $10 million than companies grow from $300B to $600B. Google's share price increased $122.61 last Friday or 13.8%. This effectively added $41 billion in market cap, which is greater than all but 94 publicly traded US companies.

Highlight Fundamentals

Google's business model focus on aggregating the world's data and making it "universally accessible and useful".

In 2012, 95% of Google's revenue is derived from targeted online advertising with the remaining amount coming from Motorola Mobile (hardware). This is not different from Facebook whereby advertising revenues made up 87% for the 6 months ended June 2013. Not surprisingly, Google's revenues tend to be cyclical in that as the general consumer's spending habits ramp up in Q4, so do businesses' advertising costs or Google's revenue. In 2012, revenue has increased due to traffic from mobile queries, ability to make monetization improvements to ad formats, and the continuing expansion of advertisers and user base. Unbeknownst to most, in May of 2012, Google completed the acquisition of Motorola for $12.5B. The deal was done to beef of Google's patent portfolio in order to protect the Android franchise.



In Q3 2013, Google's revenue grew 6% quarter over quarter to $14.89B versus $13.3B, which beat analysts estimates of 14.80B. This growth was net of Motorola's mobile segment, which has been operating at a loss. In Q3 2012 it recorded a loss of $192M versus $248M in Q3 2013. Now even though revenues only increased 6% quarter over quarter, net income actually increased 36%, this means their costs decreased for the quarter. Google was able to make more money even though they spent relatively less, which is a good sign.

Per Google's earnings release information, they will continue to invest in three major areas of focus:

1) Core ads - Search and Display advertising
2) Businesses demonstrating high consumer success - YouTube, Android, and Chrome
3) New businesses to drive adoption and innovation - Social, Commerce, and Enterprise

Highlight Technicals

From a technical perspective, there were three very good buying opportunities in the past six months. In fact, Google had been trading in a channel for six months. Every touch of the bottom of the channel would've been a great buy. If you had done that, I would've put my stop just below the bottom of the channel. This would give me the best risk to reward ratio.

Google gapped up last Friday, which means there are a couple ways you can play this. You can either enter in Monday and put your stop just below the low of Friday's or wait for a pullback and hope that it touches just below $935ish before entering with a position.



This could turn out to be another Facebook earnings gap up and run, if it decides to cooperate on Monday. It is at all time-highs, which typically means that there is no resistance up above. Unless you bought on Friday at the very top of the candle, there is nobody looking to sell at a loss.


Disclaimer: This article is written for informational purposes only and isn't intended as investment advice.
Disclosure: I have a position in GOOG.
 
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