Friday, February 16, 2007

Calls of Note Part 5

Two interesting calls out on Google (NASDAQ:GOOG) this morning.

- Bear Stearns notes that within the next 2 weeks, Google will unveil an updated quality-based bidding system. Google periodically updates its algorithm, with the most recent change taking place this past summer. Google announcement was issued here:

The major change is in the quality score rank, where lower volume ads without much historical data (or new ads for that matter), will be given more leniency on the minimum bid requirements. This has the effect of lowering the threshold for activation of these ads, driving more ad placements than before. The other ranking metrics are not changed, as this change is aimed at the lower volume campaigns.

Google is helping advertisers with the change by adding a new quality score column to the advertiser's interface. This began yesterday, but has been tested since December by a small group of advertisers. The tool will show advertisers an estimate of their ad's quality -- in general terms like "great," "ok" or "poor".

In speaking with SEMs, firm has learned they believe there are 2 major implications of these changes: 1) Google will be able to monetize advertisements that were previously deactivated, driving more revenues for Google, 2) Advertisers should see a better ROI, as they will have more information to guide their campaigns.

Firm thinks the algorithm update could therefore boost Google's sequential revenue growth in Q1 from the current consensus of 11.6%.

- Citigroup reiterating their Buy and $600 price tgt on GOOG for seven reasons: 1) They view current valuation as implying a relatively very attractive risk-reward outlook. 2) They believe recent industry datapoints -- including this week's release of the SEMPO survey -- continue to indicate a very robust profile for search advertising. 3) Firm's review of the underlying drivers of Google's search revenue demonstrates growth that is more sustainable than the market realizes. 4) Their tracking suggests that Goog continues to gain market share. 5) They believe GOOG's option value is underappreciated -- with updated worldwide traffic analysis as support. 6) Firm's proprietary ROIC analysis highlights materially very high value creation by Google. And 7) They believe that the potential loss of the Ask affiliate deal is a manageable risk.

Notablecalls: These notes should bring some buy interest to the stock following recent weakness. I especially like Bear Stearns' comments.

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