Simit Patel's  Instablog

Google (GOOG) latest earnings released was below expectations, and the stock price is feeling the hit this morning. Google is currently trading at $588, approximately 8% down from where it was yesterday prior to the earnings release.

There are a few key observations for shareholders and prospective shareholders:

1. I don't own any and don't plan on buying any -- not so much because I think Google is deeply flawed in some way, but rather because I think there are better opportunities out there. I focus on gold and uranium mining stocks, although even if we look at the technology sector, Intel (INTC) and Microsoft (MSFT) are both much more appealing; they are dividend-yielding stocks with much lower P/E ratios, factors that I think make them safer and better investments.

2. After yesterday's earnings release and today's price drop, Google/s P/E ratio is currently over 30. As a value investor, I'm very reluctant to buy stocks with a P/E that is above the current average P/E of the S&P 500, which is currently averaging just above 21. A P/E ratio of 20 would put Google's share price at 379 based on current earnings.

3. While I would need to see Google's share price drop well below 379 before I would consider buying, I doubt it will; we are still in an inflationary monetary environment, as evidenced by MZM reaching all-time highs early this year. For those looking to buy Google, I think a dip to 555 is quite likely. There is strong support there, as well as the 200 day moving average.

4. In terms of strategy, there are two disruptive opportunity that rest before Google: energy and banking. Google has invested nearly $1 billion in energy, mainly solar; I find this to be unfortunate, as I think nuclear is a far better option because of its ability to provide continuous emission-free energy at lower prices -- while the same cannot be said for solar given the current state of its technology. As for banking, it is very close; the last remaining piece for Google is the virtual currency. Whether that piece is introduced, though, remains to be seen -- and I find it unlikely, given the political obstacles involved here.

Specific Recommendations

1. Value investors should abstain from Google, unless the firm moves into nuclear energy or virtual currency -- two opportunities that fit the framework of disruptive theory and thus could be new market opportunities for Google.

2. Alternatively, value investors may find an opportunity if Google's share price falls below 380 while earnings remain unchanged; at this point, it would likely be below the average P/E of the S&P 500. Right now Google is overvalued relative to the S&P 500.

3. A third option could entice value investors would be the issuance of dividends. If Google can start to issue dividends with a yield greater than 2%, it would be in a position to attract capital currently going into Intel and Microsoft. Personally, I would still like to see share price drop to where P/E is 20 or lower before entering, even with a dividend issuance.

Patience is a virtue for value investors, and I do think such opportunities are possible. Even if they are not, though, value investors looking for "blue chip" technology stocks would be better off seeking other options -- such as Intel , Microsoft , and even Apple (AAPL).

4. The situation is much brighter for short-term traders. In terms of technical analysis, Google is showing strong support around $555. A technical trade I think would be warranted would be to enter at $555, have a stop loss at $525, with a near-term target of $645 -- its recent relative high before the plunge on missed earnings. This is a reward/risk ratio of 3:1. As I believe inflationary monetary policy and turmoul in the bond and currency market will ultimately lead to capital rushing into equities and raising indices as a whole, I think this is the safest and most compelling way to play Google, if at all.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

While I don't consider it prudent to short stocks in an inflationary environment -- which I believe we are now in, given that the US money supply, as measured by MZM, has soared to new all-time highs (and that other central banks will likely follow the Fed as they historically have) -- though I do acknowledge that shorting can have some value based on certain strategies. For instance, those who want to speculate upon a spread -- that capital will flow from one sector to another -- or as a way of hedging other long positions may find value in strategically shorting.

And in that regard, there are few opportunities I find more compelling than wind power ETFs -- namely (FAN) and (PWND).

Here's the rationale, and what type of strategies shorting these ETFs could fit into:

1. Wind gets my vote for being one of the least promising and most likely to be a scam of the alternative energy scene, surpassed only by ethanol. Wind simply takes too much land, is too expensive, create environmental headaches in the form of bird deaths, and creates literal headaches in terms of what happens to the people who live near them -- a particuarly expensive problem when one considers how much land it takes to generate powerful wind turbines. At least solar has potential opportunities in small applications -- like solar-powered computers and backpacks with solar panels -- the same opportunity is not available for wind. Moreover, because wind power generators require rare earth minerals for their construction -- an increasingly scarce commodity whose current production is controlled almost entirely by China -- the cost issue is likely to become even more significant.

2. Because wind cannot generate sufficient power and is too expensive by virtually any measure, it simply cannot survive without government stimulus. And as over 7 trillion in government bond coupons are due in 2012, I believe some forms of fiscal spending are at risk of coming to their conclusion. I doubt it will be the sacred cows of health care, social security, and national security; rather, the renewable energy that few know about and don't work anyway seem more likely, in my opinion. And so, shorting wind ETFs seems to be one of the best potential options, if one is looking for something to short in this environment.

3. Being very bullish on nuclear energy, I think a way of hedging partially against a deflationary scenario would be to couple long positions in uranium and nuclear assets with shorting wind ETFs, which I think could be hit especially hard in the event of a contraction in the money supply and a corresponding prolonged bear move in stocks.

4. Another reason I favor these ETFs as short candidates is that while both PWND and FAN are near their 52 week lows and over 50% off their highs, they are also still above $6. As such, I think there is still much room to go. If a leading solar company like First Solar (FSLR) could go from over 170 to under 30 within 2011 (a decline of over 80% in 10 months time), I think the wind ETFs could experience an even more cataclysmic fallout.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

A story that has gotten a fair bit of airplay on the leading technology blogs is that of Google Ventures using a "moneyball" approach to its process. For those unfamiliar, "Moneyball" is a term associated with the approach to selecting baseball players used by Billy Beane, General Manager of the Oakland Athletics (a professional baseball team in the United States). The term refers to making investment decisions in players based on a deep analysis of the player's performance, and combining this with analyses of other players on teams to create a model for a team's performance. Google is perhaps the most information rich company on the planet, in the sense that not only does it have access to enormous data, but it also has the competence in querying this data as needed.

How I think this is worth considering for Google shareholders:

1. Strategically, I think Google is in a great position to disrupt the banking industry (as I have noted in my previous coverage of Google on SeekingAlpha), and I believe innovating on the financial trajectory is one of the areas where the firm can be most disruptive. I believe the virtual currency is the key milestone that really unlocks the new monetary infrastructure, the one that will emerge as nation-state currencies continue on the path towards hyperinflation -- though an entire infrastructure for economic transactions will be needed, as so helping to build the financial markets of tomorrow is essential as well. I believe a new world of financial exchanges, driven by big data, "moneyball"-type approaches, as well as claiming a digital realm and a private corporation as its jurisdiction, is coming, and that Google Ventures' decision to utilize the big data approach signals another step along the way.  

2. More immediately, this could represent the means by which Google escapes trap of Bubble 2.0 -- if it can find the cheap enough startups to invest in as alternative to the ones that have been priced out by the Bubble. Moreover, I think Google has made a number of acquisitions that will prove to be overpriced; if Google Ventures can be used to help Google Inc. become a more efficient acquirer, it could yield greater earnings with a corresponding effect on share price. This does assume that Google Ventures and Google Inc. will develop a deeper relationship, which may sacrifice long-term opportunities. 

Ultimately, though I think a simple summary of this situation for shareholders is that Google's best opportunities lie in disrupting the energy and banking industries; the extent to which the big data approach being used by Google Ventures helps Google profit from building the financial markets of tomorrow is the extent to which this story constitutes a massive opportunity in real growth (beyond inflation). 


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.