Friday, October 20, 2006

Color on quarter: Google (NASDAQ:GOOG)

We have the analyst community singing praise for the Google (NASDAQ:GOOG) after the co reported strong results yesterday.

- Goldman Sachs out with note titled ""Business is very... good" - major understatement", suggesting investors to buy stock with 30% upside to their new price tgt of $595 (up from $525). Firm hihlights superior growth highlights new products, new partners and better monetization even in a seasonally weak quarter. Flat qoq margin despite record hiring should alleviate concerns about the cost of Google's recent deals. New, large growth opportunities remain: new ad formats (pay per call, display, and video) and more penetration of the top 500 advertisers.

Firm sees following catalysts that could unfold to unlock the value we see in Google shares over the next year: 1) a strong holiday season benefiting from continued advertiser demand, seasonal strength in traffic, recent product launches (Checkout's 1st holiday season), and new deals such as MTV; 2) improvement in international RPS as it narrows the gap versus domestic levels; 3) benefits from monetizing new partnerships to be launched in 2007, including eBay, MySpace, and Intuit; and 4) growth from new advertising formats such as display, video (via YouTube, MySpace, and proprietary sites), pay per call and pay per acquisition.

- JP Morgan sees plenty of positives that still haven't been priced into the stock, even at the $460 in the afterhours:

1) Google's EBITDA margins could actually rise over time -- Consensus opinion on Google has always held that Google's margins have to come down over time. Firm has been contrarians on this point to the extent that they've modeled EBITDA margins flat over time. But now, they're modeling them rising modestly over time.

2) As a near-term point, if retail this holiday season is shaping up to be exceptionally strong, then Google could be a major beneficiary -- firm believes retail is one of the largest advertising verticals on Google in terms of revenue.

3) Google's commitment to cash acquisitions in the future - rather than stock - as firm views that currency as undervalued.

4) The option value with Google -- in terms of new products and new market opportunities -- is still significant. Firm would point to Google News, Google Calendar, Google Maps, Gmail, Picasa, and even Google Video. Successful product innovation = mind share = market share = market cap, and the best product innovation in the Internet sector today clearly belongs with Google.

5) Firm considers that a $460 GOOG that trades at 38X our 2007E GAAP EPS of $12.20 and 30X our 2008E GAAP EPS of $15.12 is reasonable.

Notablecalls: Hard to find one single cautious line from the reviews. We'll just have to wait for Henry Bloget to do his thing. Have to say, the results were strong across the board. Still, look at what YHOO did the day after. Can't compare them just like that (heck, we've even got YHOO downgrade on GOOG's results), but think GOOG will get faded today.

No comments: