Laudani: Google Is Dead Money

Editor's Note: This article was originally published at 10 a.m. on Real Money on July 15. Sign up for a free trial of Real Money.

According to filings made with the Securities and Exchange Commission (SEC), Google (GOOG) (GOOGL) is one of the most widely held stocks in the U.S. market. Investors will be watching the company closely when it reports its second-quarter fiscal 2014 earnings on Thursday after the close.

Since Google missed estimates for the last two quarters, this will be an especially important report. The stock has kept investors awake at night. Year-to-date, the shares are up just 4.7% vs. 6.9% for the S&P 500. If the company doesn't produce an impressive quarter, I'm sure a lot of professional investors will rethink holding a three-time loser.

Many people seem surprised by the weakness in the stock. Folks seem to forget that as early as fiscal 2009, Google had a gross margin of 84.97%. The company ended last year with a margin of 57.72% and it is spending money like crazy.

To support their Strong Buy recommendations, analysts have figured that gross margins will magically climb higher. In fact, this year, gross margins are projected to jump to 65.64%. That's a big jump. How do they get there?

In the fist quarter, margins came in at 61.96%, which was far below the Street estimate of 67.79%. For the second quarter, analysts are at 66.45%. Last year, the company produced a 58.05% margin. An 840-basis-point jump, year-over-year, seems like a something out of a fairy tale.

Google's advantages in mobile, which includes its Android operating system, are well known. It has led in search and online video services (like YouTube) are also well known. Analysts seem to think wearable computers self-driving cars and Google fiber will be big hits. But let's be honest. While the things Google is working on may be exciting, none of those projects are likely to hit the market anytime soon.

Analysts seem to think second-quarter revenues will be strong. After traffic acquisition costs, revenue is estimated to rise 10.2% to $15.621 billion. For the full year, Google is expected to generate revenue of $66 billion.

Of the 46 analysts who publish on Google, 14 have issued Strong Buy recommendations and 22 have Buy ratings on the stock. The rest are at a hold.

I would be cautious going into the second quarter. To me, management has to find a way to boost margins before the stock will really head higher. Until then, I think Google is dead money.

At the time of publication, Laudani had no positions in any of the stocks mentioned. Christopher Laudani is the founder and president of ShortIdeas.com, a short-only equity research firm.

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