Google's higher than anticipated revenues (but lower than anticipated profits) leave analysts optimistic, but cutting prices
By Seth Weintraub, Benjamin Snyder, and JP Mangalindan
Below the fold is a roundup from the analysts above:
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Jordan Rohan from Stifel Nicolaus:
The overall tone of business for Google is strong with revenue growth exceeding our and consensus estimates. Margins were the key issue, as the company added 900 net employees in addition to bringing on 300 through the AdMob acquisition. This growth in spending pressured EBITDA margins, which fell below 60% for the first time in six quarters. Capex of $476 mn was nearly double the levels of last quarter and up fourfold over year ago levels. Overall, it is clear that Google is in investment mode in search, mobile, and display.
Price target: drops from $675 to $600
Douglas Anmuth at Barclay's:
We are maintaining our 1-Overweight rating but lowering our price target to $550 on ~17.5x ourv2011E PF EPS of $31.30. We recognize thatvGoogle shares may be under some pressure or range-bound in the very near-term & that revenuev& EBITDA growth are likely to decelerate in 2H10, but we believe Google's valuation remains reasonable at ~15x 2011E PF EPS, & closer to11x excluding cash & interest income.
Price target: drops from $650 to $550
Mark S. Mahanay, Neil A. Doshi, and Rohit Kulkarni from Citi:
If You Take Away Only One Thing From GOOG’s CQ2 Results, Let It Be This – While the expense level was a surprise to the Street, Annualized Cash Costs Per Employee were consistent with Q1 & Cash Profit Margin Per Employee was consistent with historic norms. We believe the REAL surprise was the material acceleration in U.S. Revenue. For 1st time ever, GOOG U.S. grew faster (26% Y/Y) than GOOG International (23%). This is Bullish. Because the Cyclical Recovery, Search Monetization Improvements, & New Revenue Contributions (Display, YouTube, Mobile) that are accelerating GOOG U.S. will almost inevitably soon accelerate GOOG International.
Price target: drops from $630 to $620
Deutsche Bank's Jeetil Patel, Herman Leung, and Matt Chesler:
We maintain our BUY rating on shares of Google, and lower our PT to $610. While the 2Q revenue upside was re-invested back into the business, we do think shares already reflect the re-investment (based on after-hours trading). At ~15x 2011 EPS, shares do have support from 21% profit growth in 2010 (although 16% in 2H 2010 due to re-investment), with multiple expansion from improved bottom-line performance (preferably driven by click growth) ahead. As such, we think the stock has upside to $610, or 20x 2011E EPS.
Price target: drops from $655 to $610
James Mitchell, Ingrid Chung, Jordan Monahan, and Fred Krom from Goldman Sachs: Google exceeded our 2Q10 revenue estimate by 1%, while missing our operating income and EPS estimates by 3%. Revenue growth accelerated by 2.6% yoy (ex-FX) on 1.6% easier comps, and we think, more display advertising. Expense growth outstripped revenue growth on re-staffing. As a result, operating income and EPS grew 20%-23% yoy, lagging gross revenue growth for the first time since late 2008. We raise our gross revenue estimates by 1%-3% for 2010E-2012E on higher 2Q revenue and Euro appreciation, and reduce our 2010E EPS by 1% to $28.36, 2011E EPS by 1% to $32.48, and 2012E EPS by 3% to $37.10 on more expenses.
Price target: drops from $654 to $600
Sameet Sinha and Randy Katz, JMP Securities:
We maintain our Market Outperform rating and $650 price target on Google after the company reported 2Q10 non-GAAP EPS of $6.45, missing our estimate of $6.58 and consensus at $6.48. While revenue growth accelerated from 1Q10, investors will likely focus on stepped-up opex and capex investments into emerging business which will dampen operating leverage in 2010. Our checks are indicating that Google is already gaining strong traction in the display market and we can expect benefits to accrue in early 2011; we are in favor of this investment spend, as the opportunity for Google in Display and Mobile is significant, and we would treat any pullback (stock down 4% in after market) as a buying opportunity. We have decreased our 2010 non-GAAP EPS estimate from $27.96 to $27.21 (consensus at $27.46) and our 2011 non-GAAP EPS estimate from $31.71 to $31.35 (consensus at $31.56). Our price target remains $650, which implies a 14x multiple to our 2010 adjusted EBITDA estimate of $12.7 billion, down from $12.9 billion (consensus at $12.8 billion), versus the online marketing space which trades at 9x, which we believe is justified due to Google’s dominating share of marketing budgets.
Price target: stays at $650
Imran Khan, Bridget Weishaar, Lev Polinsky, Shelby Taffer, Vasily Karasyov at J.P. Morgan:
Revenue growth beats expectations; raising our F’10 net revenue growth rate by 300 bps. Net revenue grew 0.6% sequentially, above our estimate of a 2.8% decline and ahead of the Street’s expectation for a 1.6% decline. Domestic gross revenue grew 3% Q/Q (vs. our est. of a 1% increase), with strength in most of the major ad verticals, including CPG, retail, and travel. Int’1 revenue fell 1% Q/Q, better than our estimate of a 6% decline, despite underperformance in the UK. This is likely due to strength in certain non-European currencies as well as growth in emerging markets. We are now modeling F’10 net revenue growth of 22% vs. our prior est. of 19%.
Margins weaker than expected; reducing our F’10 EBITDA margins by 130 bps. 2Q pro forma operating margin was 52.5%, below our estimate of 53.7%. Google added ~1,200 employees in the quarter, 300 of whom came from M&A activity. Margins were also impacted by an increase in professional services, advertising, and promotional spend, as well as by legal costs incurred during the quarter. We are now modeling an F’10 pro forma operating margin of 53.6%, below our prior estimate of 54.4%. Additionally our F’10 EBITDA margin of 60.2% is 130 bps below our prior est. of 61.5%.
Price target: drops from $566 to $558
Tim Boyd with MKM Partners:
We view GOOG’s in-line 2Q10 report, in which top-line upside (net revenues of $5.09bn 2% ahead of the Street) was driven by a strong acceleration in U.S. growth, while the bottom-line shortfall ($6.45 in EPS $0.08 below consensus) was a function of increased R&D and G&A expenses, as a case of strong execution during dicey economic times, with a side order of increased investment in key growth opportunities. The stock’s 4% aftermarket sell-off strikes us a short-sighted reaction to the latter, especially considering the fact that GOOG’s FTM P/E currently resides 15% below its one-year average. In other words, we believe there is room in GOOG’s current valuation for a bit of margin compression, especially given the revenue upside. Reiterate Buy and $600 PT.
Price target: stays the same at $600
Justin Post, Nat Schindler and Paul Bieber at Merrill Lynch:
Google reported mixed results with revenues up 25%, above Street at $5.09bn vs. $4.98bn, but EPS was below at $6.45 vs. $6.52 (higher taxes impacted EPS by $0.18). Revenue upside was driven by U.S./ROW acceleration q/q, but expenses were higher, resulting in a margin miss. The frustration with the results is that potential upside is being plowed into personnel (with no end in sight), and there is a lack of commitment from management to any margin target. Management’s investment horizon seems longer that the Street’s; trust & patience is required.
Price target: stays the same at $630
Marianne Wolk, Malindi Davies and Christopher Ferris, from SIG Susquehanna:
We have a lot of evidence that GOOG is developing several new growth engines with success; we believe these growth vehicles could debunk the bear story that GOOG is a cyclical single product company by 4Q10/2011 and yield upside to top- and bottom-line estimates. Short-term investments in growth engines meant EPS missed slightly in 2Q.
Price target: drops from $665 to $650