Breakout

How to Play Google Into Earnings

Jeff Macke
Breakout

Google (GOOG) reports earnings for their fourth quarter after the market close today. Average estimates are for the company to earn $10.52 per share on $12.3 billion in revenue. After what happened after third quarter earnings when Google's stock plunged after the company released numbers four hours early and 10% lower than analysts expected, anything on time and in-line with expectations would be a relief to existing investors.

What spooked the Street most last October was the utter disaster in Google's Motorola Mobility division. According to Jeff Kilburg, founder & CEO KKM Financial, that troubled division is going to be front and center on tonight's call as well.

"We're focused on where they're going to come in with that Motorola Mobility," Kilburg says. Last time around the group lost a jaw-dropping $527 million total and $151 million on an operating basis, on $2.6 billion in revenues. Now that the bloom is off the rose for the iPhone 5, the Street will give Google a pass on losing some money on smartphones, but only if the company can clearly explain why a search engine needs to make hardware.

Speaking of hardware Google won't be making, the company sold its Motorola Home Business division for $2.35 billion in a deal announced last month. Jettisoning a unit that makes set-top cable boxes makes sense, but seems to be creating some accounting issues.

In a move Kilburg says was akin to "kind of forecasting a miss," Google said Friday that "a majority of Wall Street analysts who cover Google have not reflected the Home business as discontinued operations in their estimates."

Somewhere just south of $1 billion in sales from Motorola Home were buried in Google's $12.5b revenue estimate for Q4. In effect, Google's statement suggests revenues could be lighter than expected. Then again, when a company stops selling stuff on which it loses money, revenue shortfalls aren't such a bad thing.

How to Play Google Now

Kilburg is holding his fire, pointing out that the last four earnings results have seen an average drop of about 5% in the week following the report. His way to play is to sell some puts ahead of the number. This trade wins in the event of a relatively controlled decline in the stock and the increase in option volatility that presumably would come with it.

For whatever it may be worth, I remain long Google and would look to be buying it anywhere below $660 a share, if and when the opportunity presents itself. That's in absolutely no way a recommendation, simply a disclosure in the interest of transparency.

Now that Kilburg and I have told you what we're doing, we want to hear from you. Let us know how you're playing Google tonight and long-term in the comment section below or tweet me @Jeffmacke

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