Chairman Nadler, Don’t You Ever Google Yourself?

by Dan September 13, 2019 3:29 pm • FREE ACCESS

There seems to be little in Washington that D’s & R’s can agree on, but when it comes to mega-cap tech companies, there is a sort of bi-partisan whack-a-mole contest that is not likely to abate anytime soon. This morning’s doozy reported by the WSJ… House Committee Requests Tech Executives’ Emails in Antitrust Probe:

Congress is ramping up its probe into the tech industry, with House lawmakers demanding emails and executive communications from four technology giants as they look for evidence of anticompetitive behavior.

House Judiciary Committee leaders from both parties asked Amazon.com Inc., Facebook Inc., Apple Inc. and Alphabet Inc., owner of Google, to provide by Oct. 14 reams of documents including executive communications and financial statements as well as information about competitors, market share, mergers and key business decisions.

The dozens of executives named in the requests include Amazon founder Jeff Bezos, Facebook CEO Mark Zuckerberg, Apple CEO Tim Cook and Google’s early leaders Larry Page, Sergey Brin, and Eric Schmidt.

Committee Chairman Jerrold Nadler said the requests will aid a continuing investigation, citing “growing evidence that a handful of corporations have come to capture an outsized share of online commerce and communications.”

If you are keeping track at home, those four companies listed above are being actively investigated by Congress, FTC, DOJ, and more than 30 State’s Attorney’s General. Yet in the face of these inquiries GOOGL (GOOGL) and Facebook (FB), two companies thought to face the heaviest scrutiny trade pretty well. GOOGL is just 5% from its all-time highs made in April, and 26% from its 52-week lows made in December, while FB is up more than 50% from its 52-week lows made in December and about 15% from its all-time highs made in July of 2018.

I want to look at GOOGL largely because the quarter and guidance the company put up in late July and the stock’s subsequent 10% one day gap higher.

 

Top Ranked Internet analyst Mark Mahaney from RBC Capital, who rates GOOGL a buy with a 12 month $1425 price target highlighted the following points about the quarter and guidance in a note to clients on July 25th (emphasis mine):

Q2 Results By The Numbers: Gross Revenue of $38.9B was nicely ahead of RBC/Street, with strength driven by the Three Horsemen: Mobile Search (helped by Q2 redesign & ML innovations), YouTube & Cloud. Vs. Q1, Revenue Growth accelerated across the board – across verticals and regions. In context, Q1 was the outlier, as Q2 growth rates were very consistent with prior levels. GAAP Op Income of $9.2B came in approx. 8% above RBC/Street, largely due to better than expected leverage in S&M and G&A. All in, Fundies were reasonably positive – 22% Organic Revenue growth acceled 3 pts vs. Q1 and matched the 9-year average, while GAAP Op Margin fell a modest 130 bps Y/Y (adjusting for EC fine).

Q2 Quick Hits: 1) Cloud Killin’ It – GOOGL disclosed GCP & G Suite at $8B run rate (higher than our $7B est), and mngmt intends to triple Cloud salesforce. Move over Streaming Wars…here come the Cloud Wars…; 2) YouTube Thrillin’ It – the number of YT channels with > 1MM viewers growing 75% Y/Y; 3) Ad Product Rollouts – H2 should see Discovery Ads, Gallery Ads, Showcase Ads, Bumper Machine Ads, etc…i.e. lots of innovation to maintain revenue growth; 4) Capex & Headcount Growth Slowing — GOOGL reitered that ‘19 capex growth will moderate significantly, tho headcount growth won’t moderate as guided before, due in part to Looker acquisition – we continue to believe FY19 Op Margins will be roughly stable; & 5) Record High Share Repo — $3.6B in Q2, w/ $25B new authorization (now we’re talking!), with $121B of cash & equivs.

So what’s the trade?

If you think there is a chance the stock puts up similar results in Q3 and can guide higher for Q4, then I suspect investors will be gunning this stock into year-end above the prior highs at $1300. It makes sense after the recent 7% rally in the stock to look to play for a sort of near term consolidation, and look to finance calls that will catch the earnings event in Nov expiration by selling some shorted dated out of the money premium that does not catch earnings. This trade structure is called a call calendar and here is one that make sense if you think that GOOGL can test or make new highs post their Q3 results in late October…

Bullish Trade Idea: GOOGL ($1235) Buy Oct – Nov 1300 call calendar for $15

-Sell to open 1 Oct 1300 call at $6

-Buy to open 1 Nov 1300 call or $21

Break-even on Oct expiration:

This trade performs best with a gradual move towards the 1300 strike over the next five weeks into Oct expiration. If the stock is below 1300 Oct expiration the short 1300 call will expire worthless and the trade will be left naked long the Nov 1300 call. If the stock is close to 1300 then the Nov 1300 call should have appreciated as it will have picked up deltas. At that point, it might make sense to further reduce the premium at risk by selling a higher strike call in Nov turning the trade into a vertical call spread. The max risk f this trade is the $15 premium paid, and would be at risk with a large move below the current level, or well above the 1300 strike.