The Case for Shorting Google

Yesterday's sharp drop in US equities has permabears asking: has the next leg down for US equities begun?

With that in mind, here's a look at the case for shorting Google (GOOG).

From a Fundamental Perspective

Google is a mature company in an industry of questionable growth potential. While the company is in a league of its own, its league -- CPC/CPM advertising -- is on the way out, and Google's size and maturity hinders its ability to adapt accordingly.

I expect new ad networks and publishing networks to slowly eat away at Google's primary revenue source -- text link advertising -- while revenue from text link advertising declines due to macroeconomic woes. New ad networks that can find ways to deliver engaging promotional material without relying on CPC/CPM pricing fit into the context of a disruptive innovation, in that they compete on a dimension that the incumbent -- Google -- cannot compete on.

Specifically, something like a gaming company that offers in-game advertising, is the kind of model that could disrupt Google's position as emperor of online advertising.

The company's P/E ratio is currently at 30.87 -- the average of the S&P 500 is currently 16.93, according to Robert Shiller. As bears do what they do best -- put the smackdown on overvalued assets -- I expect Google's P/E to fall noticeably, so that it is closer to the S&P 500.

From a Technical Perspective

The daily chart is interesting. While volume is low -- attributed to seasonality, and the lower volume that typically comes with August -- we do see a doji candle from several days ago.

We also see MACD just turn bearish, which could signal the onset of a new short-term bear trend.

The weekly chart is a bit more sobering for permabears, and suggests bears may need to wait a bit longer before dining on bulls. A rising wedge suggests the market is still bullish on Google, and MACD remains bullish.

Ideas for Trading Google

More conservative bears may wish to wait for a pullback to the upper trendline on the weekly chart, which would happen at around 500. However, such a pullback may not occur.

Alternatively, bears may wish to short now, with a protective stop loss order right above the high of Monday's candle which gapped down. The target profit would be the trendline drawn on the daily chart. This would only be a risk/reward ratio of 1:1, so perhaps not the best trade.

However, if US equities are ready for the next leg down, we may see a break below that trendline.

As a result, traders who scale into positions may wish to enter some now, and add to their position on a close below the lower trendline when there is more confirmation of a downtrend.

Disclosure: No position

Comments

[Jackafuss:]

Of course any stock might be a short term short but you totally miss the growth that is occurring in this industry and by Google in particular. Android Phones are being birthed faster than guinea pigs. Also, various software products put in place by Google are finally filling out and being linked together. The Google Reader, for example, has become a place where it is easy to share blogs and other information. When Google Wave begins to connect users in a new way, starting in late September, Google will have another rapidly growing place to place advertisements. While I must admit that Facebook is growing even faster, the mobile Internet is going to add a couple of billion people over the next few years and Google is adding customers in China and in other developing nations very rapidly.

Aug 18 07:14 AM

[TCK:]

At some point advertisers will find that there are diminishing returns with the proliferation of the internet advertising. Millions of eyeballs will clicking past the increasing number of ads littering the pages.

Perhaps not any time soon, but the model seems destined to go the way of direct mail marketing. When is the last time you opened one of those ?

Aug 18 09:00 AM

[archangelms:]

Your worried with a PE ratio of 30.87 when its FWD PE is only 19.
Yahoo has a PE of over 1,400 with a FWD PE of 42.
Amazon has a PE of over 53 with a FWD PE of 43
Bidu has a PE of over 72.59 with a FWD PE of 42
Priceline has over 31, Overstock FWD PE of 56 and so on.

Google has no debt, trades at a lower PE to others, trades at a low fwd PE than others, has more cash on the book than all mentioned combined, has a larger percentage of search than Yahoo, ASK and MSN combined. If it was to split the amount AMZN, YHOO or EBAY has it would be 30 dollars. Thats expensive. your wasting your article.

Aug 18 09:06 AM

[buyitcheap:]

Wouldn't a vertical put spread be a little less risky? Say a September 430-420? Grant you, the upside isn't as great, but you don't have the risk if GOOG runs away on you.

Aug 18 01:01 PM