Morgan Stanley raises GOOG forecast on upside from Instant & Mobile

December 7, 2010, 3:32 PM UTC

The investment bank added $30 to Google’s target, which may see an additional uptick on account of the strong holiday sales season.

Scott Devitt at Morgan Stanley (MS) added Google (GOOG) to the “Best Ideas” list today while raising its price target from $700 to $730.  Three factors played into the decision:

I) Google Instant, which makes searching more efficient by displaying search results as users type, could drive increased user loyalty and market share. As a secondary benefit, it could also drive revenue upside. Investors view ‘Instant’ as a key breakthrough, but are not modeling upside. Our analysis / recent data suggest ‘Instant’ may drive financial upside in CQ4E / C2011E.
II) Mobile: Given the rapid growth in mobile usage / penetration, we believe ‘Instant’ on mobile (which launched on Nov. 5th in the US) may eventually prove more important than desktop. Faster smartphone adoption could drive revenue growth “Faster for Longer.”
III) eCommerce: Initial data for the holiday eCommerce season are strong, which should support robust paid search spend on Google during the current quarter.

Google has said repeatedly that there wasn’t a revenue upside to Instant beyond making search a better experience for users.  Google’s Mobile efforts also could be in question after indications that Android activation rates may be
.  Nevertheless, Devitt lays out a rosy six months for Google’s share price:

DeVitt rationalized the raise in estimates and valuation:

  • Raising estimates: We are raising our CQ4E / C2011E net revenue est.’s to $6.2B / $26.4B and operating EPS estimates to $8.23 / $34.80 (3-4% ahead of consensus), despite increasing operating expense assumptions for 10% salary raises which will be effective January 2011.
  • Valuation: Google trades at 10x C2011E EV / EBITDA, but is poised to grow EBITDA 18% from C’09-C’12E. We expect estimate increases to drive a higher multiple.

In other investor news, Bank of America/Morgan Stanley said that The Nexus S launch shouldn’t be a factor in Google’s share price, while BMO Capital Markets initiated coverage of Google with a $700 target. Meanwhile, Ben Schachter at Macquarie reiterated his $725 target on indications of strong growth in the eCommerce sector as reported by ChannelAdvisor.

Google stock is up 2.5% this morning: