Hi everyone,

Work commitments have hit again and prevented me from posting as regularly as I had hoped over the last month but at last I’ve got around to finishing off my look at Q1 earnings and how some of the leading names in tech have reacted in light of what have, for most, been excellent results. I’ll finish up this today with the look at Google promised back in Part 2 last time round. And about time too, if I had left it much longer it would be Google’s Q2 results we’d be reviewing! For those the didn’t get to read them this series of posts began with Part 1 and Part 2 which you can read here and here.

Google Beats The Street But Shares Sell Off

After the close on April 15th Google announced it’s Q1 results and like most S&P companies it too beat the Street’s estimates. Analyst consensus was for revenues of $4.93 billion, profits of $2.7 billion and EPS of $6.56, Google came in with revenues of $5.06, profits of $2.78 billion and EPS of $6.76. So yes while it beat estimates it certainly wasn’t a beat in the same league of Apple, Intel or many other of the leading tech companies that reported excellent Q1 results. The market’s reaction was swift and severe, with the stock having run up about $40 (or 7%) to just under $600 in the days leading up the results in expectation of a blow-out quarter, the day after the results all those gains were wiped out, and some more, with the stock tanking 7.5% or $45 in a single day’s trading. And the sell-off didn’t end there, over the next 3 weeks Google sold off sharply to a low of $464 on May 6th - a drop of over 20% from the pre-results price. While many might discount this May 6th low as part of the “DOW’s Flash Crash” that day it did set a level that the stock was to revisit twice in the following couple of weeks. And $464 now looks a significant level which if Google can’t hold from here then further downside can be expected.

Google Searching For New Sources Of Revenue Growth

So what’s up with Google, excellent results which saw it throw off another $2.35 billion in free cashflow, that’s an annualised rate of close to $10 billion in free cash per year (it currently has $27 billion of cash on it’s balance sheet), yet it’s share price falls over 20% over the following month. The issue is it’s valuation, at the time it’s results Google, at close to $600 per share, was trading at a PE of 27. The recent sell-off has seen that reduce to a PE of 22 but that’s still very pricey and unless Google can continue to deliver high double digit growth year on year then the market is going to quickly bring that PE back to mid to high teens in line with a Cisco, Intel or to a lesser degree a Microsoft or HP. Generating lots of free cash each quarter is great but what the market is really interested in is how are you going to use it to drive future revenue and profit growth, especially if you are a company that doesn’t pay a dividend. Google’s most recent quarter showed revenue grow 23% over Q1 2009, that’s what the market wants to see, the question is how  does Google plan on driving another 20% plus growth come Q1 2011?

The question of where continued future revenue growth becomes even more important when many analysts believe it has saturated it’s existing online search markets and it has recently decided to all but pull out of the China – the world’s largest and fastest growing economy. While Google’s decision to pull out of China earlier this year on the grounds that it didn’t agree with the Chinese government censoring it’s results may have gained many supporters on moral grounds including senior members of the US Government, it did little to win over analysts and investors. Most saw this as an own goal by Google, a case of it taking on a battle it could never win and one that ultimately was going to cost the company billions in potential future profits. The winner out of Google’s decision was Chinese search engine Baidu which was seen as now having a free reign to mop up the ever growing Chinese online search market. It already has a 54% market share in China with Google lagging behind it with only 18% but Google had been expected to make inroads into Baidu’s dominant position. Not anymore, one look at the Baidu chart below shows us all we need to know, since Google first announced that it might pull out of China on January 12th Baidu has almost doubled in price from $39 a share to $73 today. Google on the other hand has fallen almost 20% from $590 a share to $483 today.

Baidu Share Price Doubles Since January (Click to Enlarge)

Will Mobil Search Be The Catalyst Google Needs?

As it searches (excuse the pun!) for new sources of revenue growth the mobile web and in particular the world of the smartphone seems to be high on Google’s radar. It recently got permission from the US Federal Trade Commission to complete it’s purchase of Admob, the mobile ad platform, for $750 million. Given the delay in the decision coming from the FTC many thought they may be about to block the purchase which would have been a massive blow to Google’s plans. While still in it’s early days it is expected the mobile advertising space is going to be the next big battle ground for the world’s leading players in online search, Google, Microsoft and Yahoo. And now all three have to compete directly with Apple in this space also who, with the recent announcement of it’s iAd platform as part of it’s iPhone 4 OS release, has pitched itself into a direct battle with Google. It’s no wonder Google CEO Eric Schmidt stepped down as a director from Apple’s board last August.

Closely linked to it’s efforts to gain a larger piece of the smartphone tidal wave Google also announced the launch of it’s own smartphone in early January, the Nexus One. In an effort to differentiate itself from it’s rivals is an unlocked phone and only available for purchase, initially at least, through a new Google e-Commerce website. While independent reviews of Nexus One have been largely positive to-date it appears not to have made a massive impact as regards sales (during it’s recent Q1 results Google management said the new product was profitable and that they were very happy with the uptake so far but refused to give specifics on numbers of units sold). Given the competition in this market it’s hard to see how the Nexus One is going to be Google’s next big revenue generator. Perhaps the real story here is the rise of the Android operating system, which is now powering 34 mobile phone devices. Android is now the world’s 2nd most popular smartphone operating system after recently ousting the iPhone OS and is behind only Research In Motion’s OS, the makers of the Blackberry smartphone.

So What Next For Google’s Shareprice?

So to wrap things up on Google, what’s the chart telling us. Well if we take a look at the 12 month daily chart below it’s clear Google is a broken stock. After 12 months of an almost uninterrupted uptrend during 2009 when the stock went from $280 a share in January to $630 a share in December since then the trend has clearly reversed and the stock is now languishing below well it’s 200 day moving average.

Google Daily Chart (Click twice to Enlarge)

Google will always be a volatile stock with the potential for big moves up or down on any given day but short term until it re-establishes an uptrend and gets back above it’s 200 DMA it might be best to look for alternative trades in the current market. There are many other tech stocks out there which do offer the potential for continued revenue and profit growth at rates that the market is looking for. For me, while I admire the company and use it’s search engine everyday, there are just too many question marks hanging over Google right now, particularly in relation to China, which need to be answered before I’d be ready to go long again. If you are desperate for a Google trade then perhaps going long on a re-test of $464 with a tight stop just below this level might offer the potential for a quick rebound back to $500. Alternatively, as mentioned above, if this $464 level fails to hold then going short might be your best bet. Either way be nibble in moving your stops with this one or use a trailing stop where possible.

Until next time,
Happy Trading,
SpreadTrader.ie : -)