Research Roundup: Google - Reversal or Buying Opportunity?
Data indicating that Google’s (NASD:GOOG) paid search clicks were down 7% in January from December and flat year-over-year is heightening concerns that the search company is not immune to economic downturns. While some analysts question the precision of comScore numbers, most agree that the trend is negative. Still, some see the resulting dip in Google’s stock price as a buying opportunity.
Barron’s TechTrader reports that UBS analyst Benjamin Schachter says the data leaves him “incrementally more cautious” on his outlook for the company and the stock: he trimmed his revenue estimates for Google and cut his price target to $590 from $650. More comments from TechTrader on the new data:
Jim Friedland, Cowen: “This data point indicates that a slowing economy may be having an impact on Google’s growth…we are maintaining our Outperfrom rating, but note that our estimates may be too high and expect the stock to remain under pressure in the near term.”
Rob Sanderson, American Technology Research: “We do not think that underlying fundamentals have changed that much, if at all…While we do not see a specific catalyst on the near-term horizon, we believe that current levels offer a very attractive entry point.”
Justin Post, Merrill Lynch: “Data adds risk to Google’s 2008 growth outlook highlighting that a decline in consumer spending could be causing reduced commercial search activity, and will likely drive some weakness in Google stock.”
Youssef Squali, Jefferies: “Third party data suggests continued deceleration in paid click growth on Google properties, implying that Street estimates may need to come down if the January trend persists.”
The Wall Street Journal’s MarketBeat blog points out that 19 different analysts have trimmed their price target since the last target increase on January 18.
The re-think represents concern about Google’s ability to continue to perform in a slowdown, and the data from the likes of comScore supports this, even as analysts fret that such third-party data (since Google is notoriously tight-lipped, and does not release click data until it reports earnings) has its limitations.
“We believe investors are putting a lot of weight on the comScore data given the recessionary concerns in the broader market and the fact that Google provides no guidance and there are few intra-quarter traffic sources available,” write analysts at Thomas Weisel Partners, who believe this represents an opportunity in the shares.
Silicon Alley Insider quotes RBC’s Jordan Rohan arguing that comScore unit growth fears are overblown. The stock’s cheap now, he says, February spending has picked up after a weak January, and even if Google blows the quarter, the risk/reward looks excellent:
Net: We believe that investors’ fear over weak paid-click data from Comscore is overblown. Our scenario analysis suggests even if Google misses 1Q consensus EPS 3% and 2009 estimates are lowered by 15%, s hares are currently trading at 21x.
Susquehanna Research reminds investors “these steps are by design
and that Google has a long track record of demonstrable monetization improvements from historic platform changes. Thus, we find some room for optimism that weaker paid clickswill be partially offset by stronger pricing as Google raises conversion rates – much as we saw in 4Q07. ”
Net, we are tweaking our estimates to reflect potential near-term paid click softness, but believe the long-term growth story is very much intact. Trading at just ~20x 2009E EPS and 12x 2009E EIBTDA, we believe GOOG shares are attractive.
ZD Net quotes Citigroup’s Mark Mahaney, as saying there could be “a macroeconomic dampening of commercial queries by searchers.”
Credit Suisse analyst Jim Friedland notes that the January comScore stats “indicates that a slowing economy may be having an impact on Google’s growth.” Friedland, however, makes an interesting distinction. He maintains that marketers are unlikely to cut buy on advertising that delivers results. Following that logic, he argues that Google is seeing a demand shortfall from consumers. The text ads are there, but consumers aren’t interested in following through.
“The headwinds from a weak economy may have a greater dampening effect than we initially expected,” wrote Friedland in a research note.
Stanford Group analyst Clayton Moran added that the paid search clickthrough rates are down across all search providers. That factoid would indicate that demand is lower due to economic worries., ZDNet says.
The good news is that if Google truly hits a rough patch we’ll get to see how management performs. Thus far Google has been a darling that hasn’t reached its awkward adolescent phase. We may be seeing a new phase of development for Google.
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