Michael Kramer and the clients of Mott Capital own GOOGL
Alphabet Inc. (GOOG, GOOGL) shares have lagged when compared to some if FANG friends, rising just 23% in 2020. Still, the stock has performed well enough to outperform the S&P 500, which has gained about 9% on the year. A pretty fantastic feat regardless, considering that both the S&P 500 and Alphabet had been down nearly 30% at the end of March, as fears over the coronavirus pandemic ravaged the stock market.
Some traders see even more gains for Alphabet, betting that the stock closes the gap between it and the other FANG members. The bets indicate the stock rises by as much as 19% more from its price of around $1,645 on August 28. The bullish outlook comes despite the stock trading at its highest one-year forward and two-year forward PE ratios since 2008.
Betting That The Shares Surge
On August 27, the open interest for the GOOG October 16 $1,650 and $1,950 calls increased by roughly 10,000 contracts apiece. The $1,650 calls were bought for $80.00 per contract. Additionally, the $1,950 calls were sold for $5.50 per contract. The two trades created a spread transaction, with the trader paying a total of $74.50 per contract. It is a bullish bet that Alphabet’s C shares are trading between $1,724.50 by the expiration date, an increase of about 5%, and $1,950 or 18.6% higher.
The big options bets come at a time when the stock is already trading at an all-time high and overbought levels. The stock’s relative strength index is currently 69 and would need to climb just above 70 to reach those overbought levels. However, a projection of the rally off the March lows until the middle of July, suggests the stock climbs 10% more to roughly $1,815.
It isn’t to say that it will be all smooth sailing for the stock because it is by no means cheap currently. As of August 28, the stock was trading at almost 29 times 2021 earnings estimates of $56.58 per share, and 24 times 2021 earnings estimates of $68.30 per share. What makes matters worse, is that estimates are still well below their pre-coronavirus forecasts of $62.05 per share, and $72.97 per share, despite the stock trading 9% higher than its February highs.
For Alphabet’s stock to push higher and maintain the record levels, it means that the company is going to need to start seeing a turn around in its core advertising business unit. So that earnings estimates can begin to rise again, pulling down those lofty earnings multiples, and helping to make any big rally higher stick for the long-term.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
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