By Seth Weintraub
July 7, 2010

Analyst reduces price target to $566 from $639 on lowered estimates.

JP Morgan’s Imran Khan sent a note out ahead of Google’s (GOOG) Q2 financials stating that they were dropping their price targets on Google significantly, from $639 to $566.  The $73 drop is largely due to changes in international currency rates and the discontinuation of the Nexus One, according to the report.

The US Dollar has been steadily growing stronger for months and Google announced that it would discontinue selling its Nexus One handset online in May so it isn’t certain why JP Morgan is revising its Google forecast today.

They are now modeling 2Q revenue and EPS of $4.92B and $6.38, below prior estimates of $5.07B and $6.61.

Google is up 7 points today to 443 as of 11m ET (right).

More rationale from Khan below the fold:

  • We think US gross revenue will grow 1.3% sequentially. In mid-May, Google announced on its blog that it will discontinue selling the phones online as Nexus One devices become readily available in stores. Therefore, we think 2Q domestic gross revenue will be ~$30M less than 1Q. However, based on search channel checks and our expectation for strong 2Q display performance, we expect domestic revenue excluding the phones to grow 2.3% sequentially. On a Y/Y basis, this translates into 24% growth vs. 1Q growth of 22%. We are now modeling 2Q domestic gross revenue of $3.24B vs. our prior est. of $3.38B.
  • We are now modeling int’l revenue to decline 6% Q/Q. This is below our prior estimate of down 5% sequentially. Our estimate includes a weakening Euro and pound (now based on $1.49 for the pound and $1.28 for the Euro) slightly offset by expected hedging benefits. On a Y/Y basis, ex-FX and ex-hedging, we are modeling 20% Y/Y growth vs. 22% in 1Q.
  • Review of hedging. Each month, Google enters into hedges which we believe have an average duration of 18 months. The cost of the hedges is recognized below the line with high volatility resulting in more of the cost recognized up front. Any gains on the effective portion of a cash flow hedge are reported as a component of AOCI and are reclassified to revenues when the hedged revenues are recorded. At March 31, 2010, Google expected $114M to be reclassified from AOCI to revenues within the next 12 months.
  • A look at full-year numbers. We are now modeling F’10 revenue and pro forma EPS of $20.8B and $27.39. These numbers imply 19% Y/Y growth in the US, which is reasonable given our search market forecast of 13% growth which we expect to be enhanced by market share gains. Our int’l estimate of 16% Y/Y growth is slightly below our 22% market growth forecast given FX headwinds. Finally, our EPS estimate assumes a 20-bp gain in operating margins and no interest income due to hedging expenses, which we feel makes our estimates conservative.

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