Friday, July 21, 2006

Color on Google (NASDAQ:GOOG)'s results

Several firms are commenting on Google (NASDAQ:GOOG) this morning after the co reported its Q2 estimates last night:

- Piper Jaffray says the second quarter is seasonally slow for search and, while they believe Google did gain some market share, search volume alone would not have created 9% sequential revenue growth. Piper believes Google's relentless focus on innovation both increased user activity, and hence paid clicks, and expanded advertiser coverage and monetization. The result was a highly respectable growth rate, not strongly above expectations as we had seen in 2005, but more appropriately balanced and still well above the market. This balanced growth creates more stability for the stock as Street expectations come closer in predicting Google's outcome, while upside still exists.

The premium that investors will pay for Google will not come from expectations of massive upside and analyst models changing dramatically, but rather from the fact that a $10b revenue company can still grow sales and profits at more than 75% y/y. Would be active buyers of Google ahead of what typically is much stronger second half.

Maintains Outperform and $600 tgt.

- Bear Stearns notes that in what has been a tough quarterly reporting season start for the Internet names, Google managed to hit Street expectations. While merely hitting Street expectations may not be overly impressing on the surface, what's probably most impressive was that the company continues to invest for the future while hitting near term goals. Firm thinks that Google's continued impressive market share gains, strong monetization, and rapid innovation indicate that so far their capital investments are paying off, and with competitors scrambling to catch up, they have no reason to think otherwise for the foreseeable future.

Maintains Outperform and $525 tgt.

- Goldman reiterates Buy rating with 25%-plus upside. Street estimates should move up given the outperformance vs. consensus, which should reinforce the strong secular growth outlook and be a net positive for valuation. Google's growth (just below heightened expectations) reinforces firm's view of continued strong secular industry trends, which should be more attractive to investors in a slowing cyclical environment. Google's ability to maintain its typical 800-1100 bp qoq growth spread vs. Yahoo! (at the low end due to affiliate search, see Exhibit 2) reflects its ability to leverage the Search Productivity Cycle to drive superior monetization.

- Prudential believes that Google will continue to post hyper-growth rates in the near term, which will, in turn, lead to further upside in the shares. In firm's opinion, an investment in Google is, in effect, an ownership stake in a company with maximum exposure to the online advertising market's fastest growing format. Therefore, they reiterate Overweight rating on GOOG and raise price target to $520 (from $500).

Notablecalls: Google won't move much higher from current levels until the co can show some serious FCF growth.

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