Photo: Jared Kelly via Flickr
So much for that surge to a new high.Ever since Google (GOOG) made the decision to pull out of the largest and fastest-growing Internet market in the world (China), it’s been nothing but bad news for the stock.
Here’s JP Morgan’s Imran Khan, the latest Google analyst to slash his estimates and price target:
As we near 2Q earnings, we are tweaking our estimates to reflect changes in our assumed FX rate, hedging impacts, and the elimination of Nexus phone sales. We are now modelling 2Q revenue and EPS of $4.92B and $6.38 vs. our prior estimates of $5.07B and $6.61. We are also reducing our price target to $566 from $639 given our lowered estimates. Following are our key takeaways:
- We think US gross revenue will grow 1.3% sequentially. In mid-May, Google announced on its blog that it will discontinue selling the phones online as Nexus One devices become readily available in stores. Therefore, we think 2Q domestic gross revenue will be ~$30M less than 1Q. However, based on search channel checks and our expectation for strong 2Q display performance, we expect domestic revenue excluding the phones to grow 2.3% sequentially. On a Y/Y basis, this translates into 24% growth vs. 1Q growth of 22%. We are now modelling 2Q domestic gross revenue of $3.24B vs. our prior est. of $3.38B.
- We are now modelling int’l revenue to decline 6% Q/Q. This is below our prior estimate of down 5% sequentially. Our estimate includes a weakening Euro and pound (now based on $1.49 for the pound and $1.28 for the Euro) slightly offset by expected hedging benefits. On a Y/Y basis, ex-FX and ex-hedging, we are modelling 20% Y/Y growth vs. 22% in 1Q.
- Review of hedging. Each month, Google enters into hedges which we believe have an average duration of 18 months. The cost of the hedges is recognised below the line with high volatility resulting in more of the cost recognised up front. Any gains on the effective portion of a cash flow hedge are reported as a component of AOCI and are reclassified to revenues when the hedged revenues are recorded. At March 31, 2010, Google expected $114M to be reclassified from AOCI to revenues within the next 12 months.
- A look at full-year numbers. We are now modelling F’10 revenue and pro forma EPS of $20.8B and $27.39. These numbers imply 19% Y/Y growth in the US, which is reasonable given our search market forecast of 13% growth which we expect to be enhanced by market share gains. Our int’l estimate of 16% Y/Y growth is slightly below our 22% market growth forecast given FX headwinds. Finally, our EPS estimate assumes a 20-bp gain in operating margins and no interest income due to hedging expenses, which we feel makes our estimates conservative.
Google trades at 18x its F’10E EPS vs. its large-cap internet peers at 25x. Given Google’s growth rate, we think this discount is unjustified. Hence, our OW rating.