Friday, October 18, 2013

Google (GOOG) - Are We in a Bubble? Earnings Good, but Stock Hyper Reacts to Upside

GOOG is trading $1008.89, up 13.51% with IV30™ down 13.7%. The LIVEVOL® Pro Summary is below.

Google Inc. (Google) is a global technology company. The Company’s business is primarily focused around key areas, such as search, advertising, operating systems and platforms, enterprise and hardware products.

So the story today surrounding GOOG is simple, an earnings blowout. The question is, do these numbers really mean GOOG is worth 13.5% more today than yesterday? If yes, then OK... very nice. But if not, this could be a sign of an overall market bubble forming.

Let’s start with the news (results) from earnings:
EPS: $10.74 Actual vs. $10.34 Estimated (a 3.87% out performance)
Revenue: $11.92 billion Actual vs. $11.7 billion Estimated (a 1.88% out performance)
26% annual rise in in paid clicks
8% annual drop in average price per click
Source: Everywhere, but in particular The Motley Fool and AP.

Let’s turn to the two-year GOOG Charts Tab, below. The top portion is the stock price the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).

We can see a two year stock rise from $580.70 to now over $1000 or nearly a 75% rise. Who says mega caps can’t go up huge?...

On the volatility side I actually don’t see anything remarkable. The IV30™ seems well behaved. Let’s look at an isolated IV30™ chart over the last two-years, below.

The blue “E” icons represent earnings dates and I do note how the peaks of IV30™ into earnings continue to get lower. Here’s what has my attention… A mega cap just went up $40 billion in market capitalization in one day on very nice earnings (but not blowout earnings by any stretch of the imagination). Take that with falling volatility (which means lower future looking risk) and I feel like we may be getting to, dare I say, a bubble? I mean huge stock moves up and lower future looking risk on kinda so-so out performance earnings news… in a mega-cap…

Finally, let’s turn to the Options Tab.

Across the top we can see that Nov vol is priced to 19.01% while Dec is priced to 19.56%. But who cares, GOOG is worth $340 billion.

This is trade analysis, not a recommendation.

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