Google: Monopoly Of The Internet?

| About: Alphabet Inc. (GOOG)

Google (NASDAQ:GOOG) appears to have its sights set on controlling a user's total Internet experience, from mobile devices, browsers and applications to Internet and cable TV service. Basically, Google would love for Internet users to see its brand at every turn on the Internet and every time a wallet is opened to purchase a product or service.

But when it comes to China, Google's sights have been off target, and not surprising when considering the company has to navigate around the Chinese government. Chinese Internet company Qihoo 360 (NYSE:QIHU), discussed in this article, recently dumped Google as its search engine, but Google's stock price didn't even flinch, yet Chinese Internet search company Baidu's (NASDAQ:BIDU) stock price took a nice whack.

Google has executed very well and appears to be coated with Teflon, as bad news doesn't affect the company too much, and even if it does, it quickly recovers. And, not having a significant amount of exposure in China at this point may be a blessing in disguise, as the Chinese economy has been anemic for the last couple of months.

In the company's Q2 2012 earnings call held on July 19, 2012, the company reported 54% of its revenue was generated internationally, yet outside of the U.K., international revenue is not reported with very much granularity. So, we can't really get a gauge as to how much exposure Google has to China.

Google's total consolidated revenue, including its Motorola Mobility acquisition, grew 35% year-over-year to $12.2 billion and 15% sequentially. The company noted significant currency headwinds in the second quarter. Stand alone, Google grew 21% year-over-year to $11 billion and 3% sequentially. U.S. revenue was up 20% year-over-year to $5 billion. Non-U.S. revenue was $6 billion representing growth of 22% year-over-year. U.K. revenue was up 20% year-over-year to $1.2 billion. Google boosted its headcount by 21,500 with 1200 related to Google and the rest related to the Motorola Mobility acquisition. Google now has a total head count of 54,600 employees and plans to lay off 20% of its Motorola Mobility workforce and close a third of Motorola Mobility's 94 worldwide offices.

Google indicated growth in the Americas and Asia was steady with the U.S. and Canada turning in a strong performance. The company reported Southern Europe slowed slightly due to the poor macroeconomic environment, however, Google's performance in the U.K. has accelerated.

Google recently launched Google Drive where users can store information, brought its Chrome browser out of beta, and introduced Chrome for iOS, which became the most popular free application in the Apple (NASDAQ:AAPL) store within hours of availability.

Google noted digital advertising is being de-fragmented, its enterprise efforts are reaching a turning point and the company is driving success for its customers.

Google's acquisitions of advertising company Teracent and advertising technology company Invite Media, which grew 50% last year, have been integrated into its DoubleClick advertising offering. The company's AdMob acquisition, which powers mobile advertising on Android, iOS and other platforms, has been integrated into Google's AdWords.

Google's YouTube powered NBC's live streaming of the Olympics in the U.S. and in addition to 64 other territories around the world.

Google noted the number of mobile advertisers has doubled in the last year.

Google's TV strategy appears to have changed as it recently pulled the plug on its TV advertising business and rolled out Internet and cable TV service in Kansas City dubbed Google Fiber.

On the intellectual property front, there are rumors that Google and Apple are in discussions in order to avoid a battle over patents, which recently happened between Apple and Samsung.

There are also rumors that Google is planning to ship a 3G version of its Nexus 7 tablet within a few weeks which should make the tablet market very interesting for this coming holiday season.

Google's stock price is up significantly for the year and is currently near a peak in the $680 range as shown below:

An investor that is a little queasy with Google's stock price near a peak and also with all of the anemic economies of the world might consider protecting the position. For example, a collar/protected covered call or a married put may be considered.

A collar/protected covered call may be entered by selling a call option against the stock and using some of the proceeds from selling the call option to purchase a protective put option which acts as "insurance." The protected covered call positions for a potential return, even if the price of the stock remains stagnant, and protects against a significant drop in price.

Using PowerOptions, a variety of protected covered call positions are available for Google as shown below:

The top position looks attractive with a potential return of 3% (24% annualized) and a maximum potential loss of 7.4%, even if the price of the stock drops to zero, the maximum loss which can be sustained is 7.4%. The specific call option to sell is the 2012 Oct 680 at $26.70 and the put option to purchase is the 2012 Oct 610 at $7.00.

GOOG Protected Covered Call Trade

  • GOOG stock (existing or purchased)
  • Sell 2012 Oct 680 Call at $26.70
  • Buy 2012 Oct 610 Put at $7.00

A profit/loss graph for one contract of the Google protected covered call position is shown below:

For a stock price at expiration greater than the $690 call option strike price, the position returns the full 3% return (24% annualized) and for a stock price below the $610 strike price of the put option, the value of the position remains unchanged.

If the price of the stock increases to $750 or greater, then the position can most likely be rolled in order to realize additional potential return.

A married put position may be entered by purchasing a put option against a stock. The married put position provides for unlimited upside, while protecting against a large drop in stock price. The put option is typically purchased far out-in-time in order to reduce the per day cost of the insurance.

Using PowerOptions, a variety of married put positions are found for Google for expiration in March of 2013 as shown below:

The top position looks attractive with a maximum potential loss of 6.8%, so even if the price of the stock drops to zero, the maximum potential loss is 6.8%. The specific put option to purchase is the 2013 Mar 685 at $57.

GOOG Married Put

  • GOOG stock (existing or purchased)
  • Buy 2013 Mar 685 Put at $57

A profit/loss graph for one contract of the Google married put position is shown below:

For a stock price below the $685 strike price of the put option, the value of the married put remains unchanged. For a stock price greater than the $685 strike price of the put option, income methods may be applied as described by

Look forward to hearing your comments below!

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.

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