At 42 times 2006 estimates, simply going long Google (NASDAQ:GOOG) no longer has the risk-reward scenario that intrigues me. That said, Yahoo! (NASDAQ:YHOO) stock at 62 times this year's estimates looks even less compelling. There is little doubt that Google has been taking some market share from Yahoo! and many of the company's recent quarterly reports have been lackluster as a result.
I decided to implement the long Google/short Yahoo! paired trade (at $403 and $32 per share, respectively) prior to both companies reporting their numbers this week (Google is due to release results on tomorrow, Thursday). YHOO's second quarter reported last night looks unimpressive once again, but assuming that Google's results will be equally as bad might very well be an overreaction. I would expect that the P/E ratios of the two Internet search giants will eventually converge, which would yield a solid return from this trade.
As always, opinions are welcome.