(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of GOOGL.)
Shares of Alphabet Inc. (GOOGL), the parent of search engine Google, has quietly posted strong returns in 2018, rising by about 14.5%, easily beating the S&P 500's rise of 5%. Options traders are betting the stock increases over the next four weeks by as much as 9%. The company is expected to report results after the close of trading on Monday.
Analysts are expecting the company to say earnings grew by 10.4% to $9.83 per share when it reports second-quarter results. Revenue is forecast to grow by over 23% to $32.11 billion. Earnings growth is expected to accelerate in the second half of the year and is seen rising by 39% for the full year.
The long straddle options strategy for expiration Aug. 17 is suggesting shares of Alphabet rise or fall by about 6% from the $1,250 strike price. It places the stock in a trading range of $1,133 and $1,277. But the number of bets that shares will rise massively outweigh the number of wagers that the stock will fall, by a ratio of about 13 to 1, with roughly 870 open call contracts. With the calls trading at approximately $38.50 per contract, the dollar value for the open calls is about $3.3 million—not a small bet.
Some traders are betting shares will rise much higher over the next 28 days. The call options at the $1,300 and $1,310 strike price have seen a rise in their open interest. The $1,300 strike price cost about $6.70 and would need shares of Alphabet to rise to about $1,307 per share to break even, a rise of 8.2% if held until expiration. Meanwhile, the $1,310 calls trade at roughly $5.70 per contract and imply an increase to approximately $1,316 per share, an increase of about 9%.
GOOGL Quarterly EPS Estimates data by YCharts
Analysts are looking for Alphabet's second half of 2018 to be stronger than its first half as earnings growth is forecast to accelerate. Analysts are looking for second-quarter earnings to climb by about 10.4%, but accelerating to 11% in the third quarter, and 16% in the fourth quarter.
The improving earnings outlook for the company may be one reason why traders are so bullish on the stock, likely betting on solid second-quarter results and better-than-expected guidance for the second half of 2018.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.