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Thursday, October 19, 2006

One Last Look at Google Before Earnings

Over the last 10 trading days Google (GOOG) has spent the bulk of the time trading between $420 and $430; although on 2 consecutive days it was over $430 before coming back off, and that was around the acquisition.

GOOG is expected to post $2.42 or more on EPS, which is up from $1.36 last year and up from $2.22 in Q2. Revenues are expected to be $1.8 Billion. Please remember that GOOG has been reporting the raw revenues without backing out the traffic acquisition costs (TAC) so the first headline number will probably look huge in comparison. Last quarter revenues on an ex-TAC basis were rounded to $1.675 Billion, but including the TAC the revenues were $2.46 Billion.

I have spoken with no less than 10 traders and contemporaries, and NOT A ONE is looking for anything weak. The consensus is that everything is better than fine with the company, and that Yahoo!'s woes are actually because of Yahoo!'s internal issues AND because Google is making life tough for other online companies competing against it. The company on a combined Google and YouTube basis is also now either at or just behind Yahoo! for the pole position on most pageviews measuring traffic.

There is also a feeling that Google would have had to have shown the YouTube kids that they weren't going to miss their quarter. It was an all-stock transaction. If it was cash the YouTube kids would not have any right to inquire or have any reason to care what the company does for the quarter. But since it is a stock deal, the YouTube kids are now $1.65 Billion partners based on a stock price. If GOOG shares go to $500 then they are $2 Billion partners, but if they go to $350 then they are $1.3 Billion partners. So, we can't find anyone that has said this is going to tank the earnings. We also don't get any formal guidance out of the company for future quarters and it seems as though the street analysts wait to see what little the company said and then they set their forward estimates based on a growth rate that they can live with that makes their price targets attainable.

Every consensus measuring service is slightly different. The high-end of the estimate ranges from the street is roughly $2.65 on EPS and a hair over $2 Billion on revenues. Please remember that GOOG has been reporting the raw revenues without backing out the traffic acquisition costs (TAC) so the first headline number will probably look huge in comparison.

The last fly in the ointment is that we could see a massive swing intraday tomorrow, and that is because October stock options expire tomorrow. GOOG is up $8 on the day at $427.40, but a synthetic spread expiring tomorrow here with a $430 Call ($9.30) and the $420 Put ($8.60) would cost a theoretical $17.90 for someone making the big bet. If they wanted to do a pure straddle on the $430 strike on both puts and calls it costs $5.10 more. So on the synthetic trade GOOG shares would have to fall to $402.10 or lower OR go up to $447.90 for that volatility trade to make money. Please understand that those options pricings and stock prices are based on a snapshot, so the may be different from moment to moment. As of last night there were still over 130,000 (13 million shares on a fully leveraged basis) options contracts still listed as open interest spread out among the actively traded puts and calls at various strike prices within its 90 day trading band.

The 52-week trading range is $301.21 to $475.11, and the real range over the last 3 months has mostly been $370 to $430+. It goes without saying that everyone is watching and everyone is expecting a lot from the company. What this has to make one wonder is just how much better numbers the company will have to post to keep everyone’s excitement going. We know Cramer is calling for $500 and there are even higher targets than that. Stay tuned.

Jon C. Ogg
October 19, 2006

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