Google Blows Q2: Multiple Compression to Continue

7/18 - "So, there are a couple of ways to think about Google’s (GOOG) big post-Q2 sell-off this morning. For starters, as I noted last night, there seems to be increasing evidence that online advertising is actually feeling the effects of the slower economy...On the other hand, the legion of analysts with Buy ratings on the stock almost universally believe investors are being given an opportunity here to buy the stock on the cheap."

"It is also worth noting that the big reason for the EPS miss in the quarter was not the weaker economy, but rather lower interest income, as the company used a substantial chunk of cash to pay for its acquisition of DoubleClick...The big issue here is not really the EPS miss; it is the revelation that Google lives here in the real world with the rest of us, where businesses of every stripe are cutting back on spending in many areas - including online advertising - in response to a rough macro environment."

"George Askew, Stifel Nicolaus: He reiterates a Buy rating and $675 target. He trimmed estimates to reflect the lower interest income; for 2008 he goes to $20.20, from $20.74; Q3 goes to $5.11 from $5.28. But he contends that the sell-off is not warranted, and views the chance to buy the stock under $500 as “very attractive.”

"William Morrison, ThinkPanmure: He cut his rating to Accumulate from Buy, and reduces his target to $550 from $650, citing “concerns over the impact of a slower economy on Google’s business.” Morrison says he is incrementally more cautious, given management’s acknowledgment of “isolated pockets of weakness in its core search business,” the fact that Google won’t be immune to the downturn and a belief that sell-side estimates for this year and next year are too aggressive."

"Gene Munster, Piper Jaffray: He keeps his Buy rating, but trims his price target to $806 from $819. He contends the quarter was essentially in line with the Street, and is responding more to the company’s comments on the more challenging economic environment, noting that this is a change from Google’s previous position. He thinks the stock trades sideways until September, but rallies from there.

7/18 - "Google’s growth rate has decelerated while its annual revenue has jumped from $3.2 billion to $16.6 billion in the past three years. Last quarter (Q1 2008) the company’s revenue rose 42% in a difficult financial environment. Approximately 51% of this revenue came from international markets, whose contribution increased to 52% in the second quarter, but the company had to spend more to cover its foreign exchange exposure.

Google’s share of the search engine market was 58.5% in January 2008. This figure had grown to scary 62% in May. In a previous post I mentioned that Google controls 79% of the pay-per-click ad market and derives 99% of its revenue from advertising. But according to Eric Schmidt, CEO, “Traffic and revenue have held up well despite uncertain economic conditions, as everybody knows.”

"In the near future, revenue from ads on mobile phones will also be a part of Google’s profits. As I mentioned earlier, Google still needs to increase their vertical scope and enter verticals such as Jobs, Travel, Auto, Real Estate Health and Personals...No one is yet able to hit Google where it is weak: vertical search, vertical ad networks, personalization. Microsoft and Yahoo! are mired in their own messy maneuverings, leaving the field wide open for Google to keep scoring!"

7/21 - "The recent pullback in shares of Google Inc., is “way overdone,” says Jeetil Patel, analyst at Deutsche Bank Securities, adding that he still has a buy recommendation for the giant of the search engine world.

“The company is leveraging balanced growth across three phases of the model, including distribution, monetization and optimization,” he says in a note to clients. Mr. Patel notes that Google’s second quarter highlights include “strong operating cost control, headcount growth moderation and, more importantly, 19% year-over-year growth in paid clicks."

"Mr. Patel now estimates that Google will bring in US$16.2-billion in net revenues for 2008, US$9.2-billion in earnings before interest, taxation, depreciation and amortization (EBITDA), and US$19.75 in pro-forma EPS...For 2009, Mr. Patel estimates revenue of $20.6-billion, $12.1-billion in EBITDA an $24.45 in pro-forma UPS. His target price of US$635 is based on 26x his 2009 EPS estimate."