Friday, April 18, 2008

Google GOOG has Delivered...another shorting opportunity

Few thoughts on earnings which were "missed" by main stream media:

Google has "blown up" earnings at 4.84 and meet revenue estimates at 5.2 bil. If somebody thinks that stock will go back to October Highs - think twice: company has beat only reduced estimates, just 90 days ago EPS was expected at 4.87.

On our bearish front signs of further deterioration are all over the recent financial report:
Revenue Growth Q/Q has slowed -50% from 14% to 7%, Y/Y has slowed -33% from 63% to 42%.
EPS growth was 8.7% Q/Q and 30% Y/Y. Yearly growth is still impressive, but nothing out of the ordinary in order to support bubble valuation. Lets have a look how this level of EPS growth has been achieved. Here is the surprise - welcome to the new reality: gravity still matters even in cyberspace. Capex has increased to 841.6 mil +24% Q/Q YouTube blades add broadband must be eating hard into the company's margin. Cash Flow from operations has increased only 5% Q/Q.

Our famous metrics of Free Cash Flow multiple is not leaving a lot of place for unwarranted happiness: in the Q1 FCF was 842 mil.
Now market will decide what is Google: a new technological frontier changing universe and "this time is different" or it is still an advertising company with technology edge in its model? Its customers and consumers must be living in virtual world and not facing stagflation: rising prices due to intentionally loose monetary policy and recession in real inflation adjusted output. The most encouraging for this point is Eric's "...Eric reiterated the company has not seen any macro-economic impact." It is still to come...he needs some help to see his dramatically slowing growth and FCF.
If company will be able to deliver FCF with 5% Q/Q growth for this year and CAPEX will stay at Q1 level FCF will be 4.2 bil. At 30 FCF multiple (our next stop in bearish slide compression) stock should reach Market Cap of 126 bil which will translate into USD397. Any change of heart of devoted shareholders or unfolding another bear leg in general markets and USD350will be seen as blue sky.
The higher stock goes into this bear market rally the safer will be PUT position. Apply all CS rules as usual.

Do not be stubborn (for myself) investor's enthusiasm (stupidity in some languages) should not be underestimated: wait for Technical signal Sell.
All these thoughts are for educational purposes and my own amusement only as usual.

Wednesday, April 16, 2008

Google GOOG into the earnings, strategy update.

Google has reached first projected target of downside at 430 based on Free Cash Flow valuation. Now my estimations are that this bear market rally will be sold off, Google will show further deterioration in revenue and earnings growth and with mounting evidence that the company is not immune to other mortals' slow down in economy, Google's stock will take its way to next down target of USD360. If we see Free Cash Flow deterioration from my previous estimates stock will collapse below 350 in a matter of weeks.
Action now is on Capital preservation, reduction of leverage and accumulation in resource sector. Downside protection is established by PUTs on GOOG - bubble deflating, INTC - rosy picture of "meeting" reduced guidance, SMH - Consumer hit hard, chip producers will take the hit, GM - finance mess/ consumer, AMR - oil/security mess, C - write downs, AMZN margin squeeze/consumer. All chart show high probability of another leg down in this bear market. Lundin mining is under capital preservation plan until Congo will be resolved: Calls taken on FCX, sold with profit. Calls taken on LMS, sold with profit. Core positions reduced. Put taken for downside protection. Calls will be bought if stock will go below CAD7.00 More effective capital allocation could be achieved in Junior mining sector which has been bitten into the dust. Trading around macro picture with falling dollar and accumulating in core sectors will be most effective according to my results. Stock picking in Juniors will be the must: management, properties, ability to finance exploration and development. Sector will be ignited with junior acquisition by one of the majors, but do not forget to be solvent by that time. Profit is the profit and if in any doubt - stay on the line, nobody get bankrupt from a good night sleep.