Investors Weigh Google Futures as Earnings Loom

It's always been difficult to trade Google ahead of its earnings report, but this quarter it's harder than ever.

AP

Investors are worried that the Web search company's once explosive growth could slow dramatically in the weak U.S. economy.

Yahoo is said to be seeking some sort of partnership with Google to fend off an unwanted takeover by Microsoft.

And to complicate the picture further, Google's April options expire Friday, one day after Google is due to report results, adding another layer of unpredictability to an already high-priced and volatile stock.

Options activity since the start of the month has been leaning on the call side, indicating optimism about the upcoming earnings, but some contrarians suggest buying Google puts instead; others urge investors to hedge their bets against a big swing in either direction.

"Odds are that Google shares will go lower on earnings," said Ryan Detrick, analyst at options research firm Schaeffer's Investment Research in Cincinnati, Ohio. "So we would recommend buying April puts."

At the heart of uncertainty over Google is a fierce debate among analysts over whether its rapid revenue growth has entered a long-term slide from levels near 100 percent three years ago, accelerated by economic weakness.

Bulls argue that Google is poised for strong new growth in the online brand advertising market and the emerging mobile phone ad business.

With Microsoft's bid to buy Yahoo and create a more formidable rival to Google, and a 39 percent decline in Google shares from record-levels just six months ago, this uncertainty has taken on added significance.

"I think this earnings report will be one of the most important releases from Google in awhile," said Credit Suisse equity derivatives strategist Sveinn Palsson. "There is a lot of debate on how Google will fare in a slowing U.S. economy."

Wall Street analysts expect Google's first-quarter revenue to grow 40 percent over the year-earlier quarter, according to Reuters Estimates.

Profit is expected to grow 26 percent, held back in part by accounting changes and acquisitions.

Yet a wide gulf has emerged between what analysts say Google is worth over the next 12 months and what investors are ready to pay.

The average estimate by 27 analysts who have set price targets on the stock is more than $650.

While 29 brokers have some sort of buy rating on Google, just four rate the stock's potential as neutral and no analyst recommends a sell.

Still, Google shares

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[GOOG  Loading...      ()   ] have been rangebound since February.

As of Friday's close at $457.45, the shares were down 34 percent since the start of 2008 and down 39 percent from nearly $750 in November.

The stock was down $4.44 or 1 percent to $453.01 in afternoon trade on Monday.