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Google – To Trade or Not To Trade?

7 December 2015 No Comment

google-959059_640With six products that individually have more than 1 billion users worldwide, Google is easily one of the biggest and most influential technology companies in the world. The company recently restructured and it now trades in the financial markets as Alphabet. That is, Alphabet is now the umbrella company, with Google being one of its subsidiaries. Alphabet enjoys unparalleled dominance in most of the markets it operates in, particularly web search, online advertising and mobile operating systems.

Understanding Google

Google Search is the world’s most widely used search engine, enjoying a 68.54% desktop market share and more than 90% share of the mobile segment. Android, Google’s mobile operating system, powers approximately 78% of smartphones in the world. Google also dominates the online advertising market. It is estimated that 30% of the world’s online advertising revenue ends up in Google’s coffers. This is about 4 times the next biggest earner, Facebook.

Alphabet’s stock has been on a bull run for the majority of the year, with investors confident that the company will continue to exert its dominance in the internet world. The upward momentum has also been boosted by recent earning reports released by the company.

The Q3 2015 results showed exactly why analysts continue to rate this stock as a strong buy. Google announced revenues of $18.7 billion, which represented a revenue growth of 13% year-over-year. This also meant that, cumulatively, Google’s revenues have grown at an annual compounded rate of 21.1% over the last 5 years. This growth was majorly attributed to significant growth of mobile search revenue as well as growth of YouTube and Programmatic Advertising.

The company also reported a net profit margin of 21.3% in Q3 2015. The GAAP and non-GAAP operating income was $4.7 billion and $6.1 billion, respectively, while GAAP and non-GAAP diluted earnings per share came in at $5.73 and $7.35, respectively.

Google also reported an operating cash flow of $6.0 billion, which is 1.5 times its net income, which denotes strong liquidity.  Furthermore, Alphabet’s stock is currently trading at a price to earnings ratio of about 32.5x against the industry average of 41.4, which means that they is still room for more upward price movement.

Nonetheless, there were still some weaknesses in the Q3 2015 results that will make investors wary of potential bearish retracements on Google stock. The alphabet stock is trading at a Price to book ratio multiple of 4.7x against the industry average of 3.9. The stock is also trading at a price to sales ratio multiple of 7.1x against the industry average of 6.7.

Google Fundamental Outlook

Even with its current dominance, Google’s future outlook still looks incredibly bright. The arrival of Android M will see Google protect and expand its search business in mobile devices. The operating system will add context-based searches of apps as well as replace app-based browsers with Chrome overlays.

Google also plans to focus on the enterprise market, currently dominated by Microsoft and Apple, by enhancing the capabilities of ‘Android for Work’ and ‘Chrome for Work’. This, as well as the expansion into streaming music with Google Play Music, will help the company generate new revenue.

Google has also invested heavily in other fields that might significantly boost its future earning potential. These fields include driverless cars, robotics, artificial intelligence, smart homes, and even. Success in any one of these will open or shake up an entire industry and Google will stand to reap huge rewards.

Analysts, though, point out that it is not so rosy for Google which faces competitive challenges from equally innovative and aggressive companies such as Facebook, Amazon and Apple. With its over 1.55 billion users, Facebook is the first stop for marketers who want to advertise on social media. Amazon also poses a significant threat as more than 30% of online shoppers start on their search on their website. This is more than twice those who go directly to Google. Another huge threat is from Apple, which is gradually phasing out Google’s products from its ecosystem. Last year, Apple installed Bing as the default search engine for Siri and Spotlight while it is now blocking Google Maps on CarPlay and enabling ad-blockers for mobile Safari in iOS 9.

Nevertheless, Google has proved so many times in the past that it is more than capable of dealing with threats, even from the larger companies.

Google Technical Analysis

The current price of Google is $738.41 a share. The stock has largely been trending higher since the beginning of October as investors expected a positive Q3 earnings report. The stock rose from the October opening of $611.29, past the psychological resistance of $700, to current levels. This week the stock opened at $716.38 and has steadily drifted higher. The stock is in a solid uptrend and there are no signs that the market is overbought. It is expected that the current resistance of $740 will be breached and the bullish momentum will target $800 and $850 before bearish sentiment kicks in.

Google Trading Advice

With bullish analyst expectations on the price of Google, traders should look for trade opportunities in the direction of the trend. To maximize their profits, traders can trade Google binary options using contracts such as Ladder options, which are ideal in a strong trending market and which could pay up to 500% returns.

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