For those who put stock in historical patterns, you may want to consider holding off on buying Google (NASDAQ:GOOG) until mid-summer. For four out of the past five years, between the January and the July earnings reports, Google's stock has both gone down and underperformed the S&P 500 (NYSEARCA:SPY). And for five of the past five years, Google's stock has gone up and has outperformed the S&P 500 in the second half of the year. If we take a look at the past five years with the S&P 500 set as a baseline, we can see this pattern without too much trouble.
In an earlier blog post that I wrote back in July, you can see this pattern broken down into six-month segments. In that post, I predicted that it would be wise to buy Google in advance of earnings and hold it for at least six months. So first, let's see how that strategy would have played out.
Though it's not currently at its highest point in the last six months - we have the October earnings report to thank for that - it's still up over 25%. And, in keeping with the observed pattern, in the second half of the year Google solidly outperformed the S&P 500 by about 15%.
Now, with the January earnings report coming out on January 22nd, I'm curious if Google is ready to take its fifth annual trip south, or if changing fundamentals in the company and in its industry will upset the historical pattern - that is, keep Google relatively buoyant through July. Let's take a look at some technicals to help illuminate the matter. First, I'll chart the 50-day and 150-day simple moving averages.
While there hasn't yet been a bearish crossover, the two moving averages are converging, which could be signal that Google is headed for its usual downturn. In fact, the pattern looks fairly similar to that in January of 2010, when the 50-day SMA had a slight uptick just before crossing below the 150-day average right as the stock price fell. Based on Google's past cyclical behavior, this could support the theory that Google may again be heading south.
The Bollinger Bands tell a similar story: Google has been riding its upper range, in a pattern that again looks like January 2010 when there was a drop, a small rally, and then a more significant decline. Additionally, the volume, shown in the bar graph below, looks like it's gradually lightening up, potentially indicating that this climb upwards may be running out of legs.
If we switch over to the Relative Strength Index (RSI), shown below, we can see that it has mimicked the price action in the past. The RSI is a momentum oscillator, and the general wisdom is that, for this 14-day time period, if it's at 70 or above it's overbought, and if it's at 30 or below it's oversold. And, though the trend is weakening a bit as the RSI has come down in the past few weeks, it is still over 55 which is an indication that the stock is overbought and may be headed for a downturn soon.
Do Fundamentals Change Anything?
From this quick historical and technical survey, it looks like Google may be at the beginning of a six-month decline, just as it has been for four out of the five past Januaries. But there are reasons to think that Google could power through its usual first-half slump. For one, Google is operating in a highly dynamic market and since co-founder Larry Page has taken over as CEO in April, there have been some structural changes within the organization. So, while many professional analysts - Argus, Citi (NYSE:C), S&P - rate Google as "Buy" for the long term, what are factors that could potentially break the observed cycle of the January downturn and make Google a short-term "Buy" as well?
In reading analyst reports (Morningstar, Argus, S&P, Citi), Motorola Mobility, which Google acquired last spring, seems to be considered the biggest wild card in Google's short-term future. While it had a disappointing first full quarter with Google, Larry Page has been working hard to cut its costs and sell off parts of the company that are bogging down its balance sheet. This could be just the thing Google needs to be buoyed above the S&P 500 in the coming months.
Integrated Product Strategy
Since becoming CEO in April, Larry Page has also gotten much more aggressive about accelerating revenue growth through a variety of channels. For starters, and to the chagrin of some of its users, Google has started to break down the walls between its different services. With more shared data, Google can provide more targeted advertising for which advertisers are willing to pay a higher premium. Combine this with double-digit growth in Internet advertising and Google's overwhelmingly dominant market share, and Google is looking well positioned to (continue to) rake in Internet advertising dollars.
There's also YouTube, Google's humble cash cow, which continues to generate billions in advertising revenue (Credit Suisse). Not only has Google stepped up its video advertisements (indeed, you cannot escape them anymore), it's expanding its original programming to Europe, and in general continues to mow down the competition. No real breaking news here, except that if next week's earnings report shows continued revenue growth in the area, investors may reward Google with buying action.
And then, of course, there's mobile search. There's been a lot of debate about how Google will handle the rise of mobile, as every advantage of mobile also opens up a potential pitfall. On the one hand, mobile search means that people are able to search more often. But, right now advertisers pay less for mobile ads because they don't translate into purchases at the same rate that desktop searches do. That may change, though, as mobile commerce increases and as Google invents new types of mobile advertisements. And, one of the greatest advantages of mobile search is the opportunity to leverage smartphone's GPS capabilities for hyper-local and relevant advertising based on exact location. But then again, there are also those pesky apps, which allow users to bypass the search process all together. Mobile has put Google and its competitors on shifting sands, and it remains to be seen if it will find steady footing, or be left in the dust.
However, there is reason to think that Google can still navigate the mobile minefield intact. The popularity of Android is skyrocketing, and while Google doesn't make any money off the platform directly, it does make money off of Google Play, and management is hoping that Android will hook users into the vast array of Google products. Additionally, addressing the limited-pixel problem with mobile, cellphone screens are getting bigger and tablets are growing in popularity, so there will be more space for ads in mobile. And even if Google doesn't get paid as much for mobile ads, it still earns revenue from them, and fortunately for Google mobile search is increasing exponentially.
What to do?
So will the pendulum swing back down and cause Google to again dip below the S&P 500, or will strengthening fundamentals and favorable market conditions allow Google to break through to more growth? It's tough to say - the signals are mixed. Given its technicals and historical pattern, if you want to play it safe, I'd stay out and reassess in July. To play that move more aggressively, you could short Google and long the S&P. Or if you have faith in Larry Page's leadership and trust what he's done so far, then you could buy now and hope that the meteoric rise of mobile will break the historical pattern and propel Google to new heights.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.