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Handling Google's Possible Exit From China


This news doesn't change the overall story.

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

I recently added shares of Google (GOOG) back under $595 and I likely won't let this China issue knock me out of them. However, the breach of the 50-day may hold me back from purchasing shares right away, so I can gauge the reaction and see how much cheaper I can acquire shares. Don't get me wrong, I'm an aggressive buyer on weakness but sometimes you have to sit back and see what the market gives you.

Back to Google and my take on the financial ramifications:

  • My estimate is that Google is only getting $240 million to $350 million (per annum) in revenue from China. And I may even be high with that on the midpoint.

  • I don't know what Google is making in EPS from China but I suspect it's not much.

  • I did a lot of work on this years ago (two to three years), and if it's still the case, much of the Google searches are essentially taken from them and/or routed to Baidu (BIDU). This was one of the reasons for owning Baidu early back in the day.

  • Holistically I like the hard-line stance from Google.

  • I think this will hurt the share price short term, far more than any real damage to business -- both short- and long-term.

  • Long-term the implications are potentially powerful as this engenders a lot of powerful, positive emotions to potential Chinese users.

  • Does this tell us anything about how its quarter is shaping up, or how it feels about internal business growth?

  • Does this also curry some favor with the US government in that Google may find information to help with trade negotiations? Jury is out on this one.

  • Before Baidu totally uncorks the champagne, Google isn't out of China yet and had been slowly grabbing some share.

  • Lastly, I do see Baidu as a potential short should it ramp parabolic -- say a $65 to $80 move higher.

Bottom line, I don't think this changes the story with Google at all. It certainly doesn't hinder nearer-term revenues and EPS generation, and any damage to the stock is likely short-term but also unknown.

However, as stated, it's hard to know how much they'll take out of Google due to this story. So I'm on sidelines until either:

1. the TAs clear up
2. we get a few days closer to earnings (which will be huge) or
3. the stock falls below $575.

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Position in GOOG

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