Analyst roundup on Google earnings, lavish praise editionOctober 15, 2010: 11:53 AM ET
As GOOG flirts with $600 this morning, analysts are weighing in and raising forecasts.
Jordan Rohan of Stifel Nicolaus set the tone and raised his price target from $600 to $650:
Google reported a quarter that should reset the thinking of skeptics. Revenue growth handily beat our street-high estimates and consensus. The company showed margin improvement on a sequential basis, despite adding over 1,500 employees and an incremental $140mn in cash expenses. We believe the acceleration in key revenue growth metrics and the increased transparency related to mobile and display segments will help to drive a higher valuation, as the company seems better positioned to grow robustly for a longer period of time.
Justin Post from Merryl Lynch Bank of America raises his price target from $640 to $710:
Google reported solid results, exceeding Street consensus for both revenue growth (net revenue of $5.48bn vs. Street at $5.26bn) and EPS ($7.64 vs. Street at $6.68). The core search business growth remains strong, with international-ex FX and hedging accelerating to 24% growth (up 100bps q/q, 550bps better than we modeled). Interest income and lower taxes contributed about 65% of the earnings beat. Opex was $110mn higher than we expected and, as we feared into the quarter, higher capex and hiring (over 1,500 people) were negative leading indicators for margins in 4Q and 2011. However, revenue upside was the story of the quarter, and will help justify the additional spending (for now).
Morgan Stanley's Mary Meeker raises her price target to $700 with a few bullet points:
- Impressive CQ3 results – Net revenue growth of +25% Y/Y (vs. +25% / +24% Y/Y in CQ2 / CQ1) was impressive + ahead of our / street estimates of +20% Y/Y, and suggests the secular recovery in online advertising continued. Adjusted EBITDA of $3.3B (+18% Y/Y and 60% margin) came in ahead of expectations. Operating EPS (excluding stock-based compensation) came in at $7.64, above our / consensus estimates of $6.67 / $6.68.
- Strong / accelerating underlying metrics – Domestic gross revenue grew +26% Y/Y, stable vs. CQ2 levels. On a constant-currency basis, UK revenue accelerated to +19% Y/Y from +17% Y/Y in CQ2 and revenue from the rest of the world accelerated to +26% Y/Y from +25% Y/Y in CQ2. Paid clicks growth accelerated to +16% Y/Y, ahead of our +14% Y/Y estimate and +15% Y/Y in CQ2. Cost-per-click (CPC) growth was strong at +3% Q/Q, ahead of our estimate of +1% Q/Q.
- Non-search businesses reaching scale faster than expected – Google disclosed for the first time that the display advertising and mobile businesses were operating at $2.5B / $1B annualized gross revenue run-rates, respectively. Based on our math, display and mobile could generate ~10%+ of Google's gross revenue in the next 12 months. Based on this momentum, Google's investments in these areas are clearly beginning to pay off.
- Reiterate Overweight rating with DCF of $700 – We are raising our net revenue (ex-TAC) / Operating EPS (ex. stock-based compensation) estimates due to the strong growth in paid clicks / CPC as well as momentum in display and mobile advertising. Our CQ4E net revenue / adjusted EBITDA / Operating EPS (ex. stock comp.) go to $6.01B / $3.66B / $7.75 (from $5.80B / $3.56B / $7.54). We are also increasing our C2011E net revenue / adjusted EBITDA / Operating EPS (ex. stock comp.) estimates to $24.85B / $15.00B
Citi upped their price target over $100:
We raised our PT from $620 to $725 as we switched our valuation frameworkfor 2012 and raised our revenue and EPS estimates as the company's non-coresearch businesses (Mobile, Display, YouTube and Enterprise) are now a material part of Google's total business and potentially growing faster than core-Web Search.
Deutsche Bank's Jeetil Patel:
We are raising our price target to $650 from $610 previously. Our new price target is based on 20x 2011E EPS (or 23x 2010E EPS). We think this premium multiple to the market (S&P500 multiple of 16x) is justified given the secular growth of Internet ads and better-than-expected growth at Google vs. market growth. With an improved growth profile, we think the market re-visits the Google story as a core growth holding in the Internet, tech and media landscape. Investment risks include: slowing query growth, slowdown in ad spending, competition, currency fluctuations, tech obsolescence, and new interactive media.
Southridge's Brian Bolan says:
Google posted impressive 3rd quarter results yesterday and took advantage of those strong numbers to try to put an end of the pessimism that has surrounded the stock for the last several months. Easily the most informative conference call to come from Google in the last 18-24 months, the company allowed Wall Street a taste of the metrics it has craved since day one. The conference call ended with the idea management was looking to instill confidence that Google will continue to grow.
Management has been questioned of late after reports of a Google driven car made the blog rounds and finally confirmed on a post on the official blog. The questions of the company losing focus have been answered and a stock up 50+points or about 10% in after hours is overwhelmingly positive.
The revelation of several metrics around display, YouTube and mobile will likely send the stock higher for some time to come. All metrics implied significant historical growth and it was noted that each area is currently growing. The growth idea is not much of a surprise, but Google straying from its normal policy of providing no data or metrics is. Clearly done to lay a foundation of confidence in the company, it may have also been a message to the general market as the company also moved to increase headcount by 1500 in the quarter.
We are thoroughly impressed with the results and have moved our estimates higher for the remainder of the year as well as for 2011. We continue to rate the stock a BUY and believe that an 18x multiple for 2011 earnings is warranted, thereby producing a new, rounded price target of $650.
William Blair's Meggan Friedman:
Google reported strong third-quarter results this evening, with higher-than-expected net revenue and profitability. Net revenue growth of 25% beat our estimate by 6% and StreetAccount consensus by 5%. Non-GAAP EPS of $7.64 also came in almost a dollar ahead of our estimate of $6.67 and the StreetAccount consensus estimate of $6.69. We would characterize management's tone as upbeat, as management noted during the call that they were "very pleased" with the quarter's results, having seen "strong growth" in the core business and "very strong growth" in emerging segments.
Colin W. Gillis at BCG Partners, still relatively bearish:
We maintain our HOLD rating on Google with a $610 target (raised from $580).
Douglas Anmuth at Barclays Capital gets back out in front and raises target price $125 to $675:
We reiterate our 1-Overweight rating on Google shares and are raising our price target to $675 [from $550] based on 20x 2011E PF EPS of $33.71. We believe 3Q10 results and increasing evidence that display and mobile are becoming more material drivers will help bring investors back to Google shares. Accelerating growth and strong profitability could drive a combination of higher estimates and multiple expansion in the near-term.
Display and mobile combined now account for ~12% of gross revenue and we view the increased disclosure positively as management seemed to hear investors who have been requesting more detail here. With display and mobile now on a combined run-rate of $3.5 billion and more transparent within the company's numbers, we believe the Street will begin to give Google more credit for these newer revenue sources. For 4Q10 we project 10.8% Q/Q net revenue growth and $8.03 in PF EPS. For 2011 we project net revenue growth of 17.8% Y/Y and PF EPS of $33.71.
And finally, James Mitchell at Goldman Sachs (GS) raises target from $625 to $700
Google exceeded our gross revenue (up 23% yoy) and EBITDA (up 18% yoy) estimates by 3%-4% on faster paid lead growth, which we attribute to monetization initiatives within search and new activities such as display. Margins were up fractionally qoq despite charitable donations, down yoy on a negative mix shift and resumed hiring activity. EPS (up 30% yoy) exceeded our forecast by 11% due to less depreciation, a tax benefit, and higher interest income. Free cash flow declined 16% yoy due to capex.
Given higher earnings estimates and first-time disclosure of the size of new growth activities, we raise our six-month, DCF-based target price to $700 (from $625), equivalent to 21X our 2011E and 18X our 2012E EPS.
And some observations from the cheap seats: The more Google talks about its "wacky but noble" car and windmill adventures, the less it is worried about shareholder revolt. These "non-core" business exploits could be seen as signs that Google is financially healthy.