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A Coming 300-Point Rally in Alphabet Stock

Nicolas Chahine

Spoiler alert: I will start this write up with the conclusion: Alphabet Stock (NASDAQ:GOOG, NADSAQ:GOOGL) still dominates search advertising, and the unit remains a massive cash cow. So GOOGL stock is a conviction buy even before other venues blossom.

A Coming 300-Point Rally in Alphabet Stock

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The month of May was not nice to Alphabet stock. After reporting earnings late in April, GOOGL fell off a cliff into a 20% correction from top to bottom. Luckily, the bulls were able to recover almost all of it after the spike on the most recent earnings report.

Since then, the GOOGL stock price followed the market gyrations into a few tizzies. Most recently it was from China currency headlines and a crash in bond yields, which is still ongoing.

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Where Does Alphabet Stock Stand?

The point today is to verify that the GOOGL stock price remains a hold for the long term. There is absolutely no reason to short it, and not for years to come.

Yes, it does have competition mostly from its cohorts of the FANG acronym. Facebook (NASDAQ:FB) and Amazon (NASDAQ:AMZN) are the two that could pose the biggest threats to Google’s advertising business. But since the whole world is in a trend to move into cyberspace, there will be plenty of room for all three of them to co-exist.

Besides, Alphabet has other ventures brewing. Most notable of them is the self-driving venture with Waymo. Consensus is that they will be early entrants into the self driving car industry whenever that happens.

Furthermore, the current valuation metrics for GOOGL stck are fair. There is no obvious bloat, and that makes the downside risk limited. Sure, the stock will fall on geopolitical headlines, but it won’t crash on its own.

GOOGL stock currently sells at a 24x trailing price-to-earnings ratio and six times sales. This is about 25% cheaper than Facebook. So there is not a lot a froth to shed in times of trouble.

Alphabet Stock Will Rally in Spite of Extraneous Risks

It is important to note that all of the mega-cap social media stocks, which also includes Twitter (NYSE:TWTR), are under political fire. This is especially true — and the threat is more acute — when approaching an election season. I bet that the politicians are not done barking at Google, so caution is still warranted while holding the Alphabet stock.

There are easy ways to use options to temporarily protect against major debacles, but there is no imminent threat yet. I believe that the management team is savvy enough to navigate the political challenges ahead. In other words they have a giant team of lawyers to drown out and bog down the offenses.

Also, Europe is intent on mooching off of the success of the u.s. internet stocks like Google. But President Trump recently threatened France of pursuing that too liberally. In any case, I doubt that this is a threat to the GOOGL overall model so the Alphabet stock will survive the short-term legal headwinds.

From a trading perspective, if I am holding GOOGL stock I have no reason to sell it. This would also be an okay time to start a small position. Sizing is important, because there are still geopolitical threats that could temporarily derail the equity markets. It is best to take positions in tranches and not all at once. This leaves room to manage the risks.

The Trade

Those who know options can take bullish positions in Alphabet stock with no money out of pocket. I can sell the Jan Google $900 put option and collect almost $8 to open. This way I don’t even need a rally to profit. As long as the GOOGL stock price stays above my put, I win 100%. Otherwise I own the shares and break even at $893. This leaves room for a 25% buffer between here and my risk.

Alphabet stock is trading inside of a 300-point range just above its weekly point-of-control at $1,060. So if the bulls are able to break out from the $1,280 per share area, then they could trigger a 300-point rally from there. So it is possible that by first quarter of next year, Google stock could be at $1,550 per share if the geopolitical headlines cooperate.

For the next two weeks, volatility remains high as we approach the deadline for starting the new U.S. tariffs on China. Undoubtedly the rhetoric will heat up and investors will get more nervous. But conversely any progress or punts in the negotiations deadlines would relieve this pressure and open the door for more upside.

This week we saw evidence of this when even when the scary headlines were fresh, equity markets shrugged off the extreme volatility and rallied hard. The bulls are still in control and only a Black Swan event can change that for as long as the Federal Reserve has its safety net below the economy.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room free here.

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