Is the Bad News Over for Google?

04/16/2008 12:00 am EST

Focus: STOCKS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

Elizabeth Harrow of Schaeffer's Investment Research says a recent bearish article on the search-engine king doesn't compensate for the pervasive bullish sentiment on the stock.

An April 3rd article in BusinessWeek ("Google: What Goes Up.") notes that Google (Nasdaq: GOOG), once the golden child of the tech sector, "is finally discovering gravity." Thanks to a fourth-quarter revenue miss and recent comScore reports that point to flat-lining growth in paid ad clicks, Wall Street is becoming wary of the Internet-search behemoth.

Author Robert Hof adds that GOOG's share price "has plunged 38% from its all-time peak, an intraday high of $747.24 last November-one of the worst performances by a blue-chip tech stock." Amidst this turning tide of sentiment, no less than 16 analysts have trimmed their first-quarter profit estimates.

While Google's top brass has assured investors and analysts that the paid-click slowdown was purposeful and that the company is feeling no ill effects from an economic deceleration, the article points out that Google faces other challenges. Key executives are fleeing the giant company in favor of smaller tech start-ups, and Google's "seemingly scattershot attempts to find new avenues of growth in everything from online video ads to office software to wireless communications so far haven't produced much revenue."

The article sums up the company's challenges by noting that Google seems to be facing "a moment of truth.: Can it hold on to the magic that has made it perhaps the world's most enchanted corporation?"

[Now] Wall Street certainly punished GOOG following its fourth-quarter sales disappointment-the stock is now trading at late-2006 levels, and recent rebound attempts have been rebuffed by the equity's ten-week moving average. However, despite the many technical and fundamental challenges facing GOOG, investors and analysts are still overwhelmingly optimistic toward the shares.

GOOG's Schaeffer's put/call open interest ratio (SOIR) of 0.56 ranks lower than 80% of comparable readings taken during the past year, revealing a definite preference for bullish bets over bearish ones. Plus, peak call open interest in the front-month series lies at the April 500 strike, which is deep out of the money. This configuration reveals that GOOG bulls have very high hopes for the stock.

Despite the wave of reduced earnings estimates, analysts are also still aligned in the bulls' camp. Zacks reports that GOOG has 13 Strong Buy and three Buy ratings, compared to just four Holds. Should the tech firm's fundamentals continue to disappoint, these brokerage firms may see fit to hand out downgrades. Any negative commentary from the pros on Wall Street could spark a wave of selling pressure, accelerating GOOG's decline.

(The stock closed below $447 Tuesday-Editor.)

Subscribe to the Option Advisor here.

Related Articles on STOCKS