Wednesday, June 20, 2012

Google (NASDAQ:GOOG): Lower Estimates and Target on Soft Search & Euro Decline - Benchmark

Benchmark's Clayton Moran is making an interesting call in Google (NASDAQ:GOOG) this morning saying business has slowed down markedly in Europe and is showing similar signs in the U.S.

- Price target is cut to $615 from $650, while Q2 EPS declines below consensus.

Firm says they reduce estimates based on their 2Q channel checks. They believe Google is likely to miss the consensus estimate for net revenue due to the following: European online advertising has weakened further, the decline in the Euro currency, and, fairly soft domestic search volume; specifically in retail. Street consensus for 2Q12 net revenue growth is 22% y/y, down from 25% in 1Q12, in part reflecting some of these issues. But they believe 19% to 20% is more likely. Firm maintains a Hold rating.

Benchmark notes they have been concerned about the European drag on Google’s growth since early January when they downgraded Google from Buy to Hold. Channel checks indicate that the European online advertising sector has weakened further in 2Q. They believe it is roughly flat y/y while the economy is contracting.

Google derives 35%-40% of its revenue from Europe and controls over 90% of the search market; Benchmark expects Europe will continue to drag down its revenue growth.
In addition, the Euro is down 5% sequentially and 12% y/y (Google converts on a one month lag). They estimate the Euro decline could cost Google as much as 4 percentage points in y/y growth, although Google has historically done well hedging FX risk. Europe and the Euro are headwinds for Google’s overall 2Q performance and the closely watched cost-per-click metric.

The 2Q domestic online advertising market appears decent, but could be showing initial signs of slowing, per checks. There is no uptick in activity and advertisers remain cautious. comScore says Google search volume growth decelerated and was light of Benchmark estimate. In addition, some checks revealed softness in the retail category with sequential deceleration in growth through the quarter. The recent macroeconomic slowing may be having a negative affect on domestic search. Benchmark believes the domestic online ad industry grew about 10% to 12% y/y in 2Q.
 
Notablecalls: Moran cut GOOG to Hold on Jan 5 just days before the 100 pt drop in share price. He had been a GOOG bull since 2009. This lends him some Street cred.

Weakness in Europe doesn't come as a surprise but the cautious comments regarding domestic online advertising are likely to catch some attention.

I would not be surprised to see some n-t pressure in GOOG. They are set to report in 3 weeks.

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