Google Disappoints

By Dr. Duru written for One-Twenty

July 19, 2007

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An earnings miss of 3 cents and revenue that "only" met expectations. That would typically sound like an OK quarter, but when you attach Google (GOOG) to that kind of earnings headline it spells DISAPPOINTMENT. I dare say tonight's earnings report from Google is their worst yet relative to expectations. Google said things like: they are now “cautious on their hiring levels, R&D expenses continue to increase, cost of revenue went up", etc... Given the high expectations and the run-up into earnings (10% over six weeks, 21% over two months), I am surprised Google is not down more than 7.5% in after-hours. Perhaps the games of options expiration week will hold it here, levitating above $500, but watch out after Friday. This dip is not a buying opportunity until we wring out at least the last two months of excited anticipation.

In past missives, I have said that the folks playing Google earnings are better off being options sellers than buyers. It looks like put buyers are going to make out big tomorrow morning. Thinking very quickly about what was different this time besides the actual news, I have to point to the run in Google's stock into earnings. Recall that Google sold off after its April earnings announcement, only to bottom in May and never look back. According to an earlier analysis, GOOG has run up in price into the final days of earnings only once before. This happened essentially two years ago on July 21, 2005. Yep, you guessed it: GOOG sold off the next day. That loss was less than 4%. I do not think GOOG gets off so easily this time around. If it is any encouragement, this analysis also shows that GOOG's price has bottomed no later than 64 days after earnings, and more typically 30-40 days after earnings. That sounds about right to settle scores between the over-eager bulls and the skeptical bears.

Be careful out there!

© DR. DURU®, 2007