Alphabet Soup

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02162016

by Bill Baker, J.D.
Editor and Publisher SINL

On 02102016 I discussed Amazon (AMZN) stock price movements, option strategies and the 01282016 earnings report. Now, I'm going to take a look at GOOGLE's (GOOGGOOGL) recent earnings report, stock price movements and option strategies.

GOOGLE GOOD

Alphabet, Inc. (GOOGGOOGL) -- After the market close on 02/01/2016, Google parent Alphabet, Inc. reported earnings for its fourth quarter that ended 12312015. Net income for the entire Alphabet entity amounted to $4.92 billion ($7.06 per share). For the same period last year, quarterly net income was reported as $4.68 billion ($6.79 per share). Alphabet's revenue increased to $21.33 billion which represented an 18% increase over last year's $18.1 billion of reported revenue.

TO THE MOON

The 02/01/2016 Alphabet earnings report was the first time that Alphabet separately identified the revenue, capital expenditures and operating income for its "moonshot" initiatives and its Google online advertising search businesses, Android and YouTube. Alphabet's "moonshot initiatives" include, but are not limited to: Google Fiber, Google Capital, Google Ventures, Nest, Verily (formerly Google Life Sciences), X, Calico, Sidewalk Labs. The good news was that during 2015, Alphabet's "moonshot initiatives" generated $448 million in revenue. The bad news was that when all was said and done, Alphabet reported an overall loss of $3.57 billion from these ventures. During 2014, Alphabet's "moonshot initiatives" generated $327 million of revenue and an overall loss of $1.94 billion.

Alphabet's spending on the diverse project initiatives presented in the previous paragraph has reduced its profit margin from 30.98% in 2011 to 25.8% in 2015. A February 2. 2016 Reuters article reported that:

"The operating profit margin for its Google unit was 31.9 percent in the most recent quarter, compared to 25 percent for Alphabet."

SOONER RATHER THAN LATER

With each passing year, the pressure will increase for one or more Alphabet "moonshot" initiative to become successful and profitable. Alphabet's high growth/profit core Google, YouTube, Android businesses will provide Alphabet with the financial cover it needs to pursue its "moonshot" initiatives without adversely affecting GOOG or GOOGL share prices, However, because Alphabet is pouring billions of dollars into these "moonshots" each year, analysts and investors will be closely monitoring the progress and profitability of these expensive initiatives. That being said, sooner rather than later would be the time for one or more of the Alphabet  "moonshots" to start showing both success and profitability.

Right now and into the foreseeable future, Alphabet is well positioned to realize tremendous growth and profitability from its growing core Google, YouTube and Android businesses. Alphabet's stable of attractive "moonshot" initiatives provide an attractive layer of high risk, high reward investments on top of the proven, high growth, high return Google core that will eventually show slower growth as these core businesses mature.

Alphabet spread its "moonshot" bets among a wide array of cutting edge technology investments in diverse, unrelated sectors that affect almost every aspect of the world economy.  This will insulate the "moonshot" initiative program from sector specific slowdowns while at the same time allowing participation in evolving ultra growth sectors.   

GOOG AND GOOGL OPTION INVESTMENT IDEAS

On 02122016, the Nasdaq closed at 4337.51 +70.68 (1.66%); the DJIA closed at 15,873.84 +313.86; the S&P 500 closed at 1,864.78 +35.70 (1.95%). GOOG closed at 682.40 -.71 (-.10%); GOOGL closed at 706.89 +.53 (.08%). 

On the first day of trading (02022016), after Alphabet reported earnings for its fourth quarter that ended 12312015 after market hours on 02012016; GOOG stock reached a high of 789.87 and GOOGL reached a high of 810.35. Both GOOG and GOOGL have declined more than 100 points since 02022016. 

That being said, GOOG and GOOGL could quickly make a move toward the 1000 per share price point that they have been poised to hit before being set back by a consistently weak market. Specifically, the share prices of internet stocks, such as AMZN, LNKD and GOOG, have been beaten down despite publishing strong earnings reports. As far as GOOG and GOOGL are concerned, these shares should rally when the tech sector recovers during the next two months.

Here are  a few GOOG and GOOGL option ideas:

Buy 10 GOOG June 17 '16 900 calls (1.55 x 2.55)
or

Buy 10 GOOG June 17 '16 940 calls (.60 x 1.30)
and
Buy 10 GOOG June 17
 '16 400 puts (.55 x 1.80)
or

Buy 10 GOOG June 17 '16 420 puts (.60 x 2.55)