Citi analyst Mark Mahaney is sticking with Google (GOOG), which has indeed had a nice run of late.
Search spending seems weak so far this quarter, but Mark thinks Google estimates are low enough that this is already in the stock. Mark also views the current P/E multiple–15X–as a “trough” multiple, and sees more upside than downside over the next year.
We disagree about the stock: 15X seems like a reasonable multiple for a company this huge, especially one with decelerating growth, a waning product cycle, and no new revenue engine yet visible. And we would heavily discount the “25X average” of the past few years, when Google was firing on all cylinders and the stock market was buoyant.
But Google is a financial fortress (no debt, $10+ billion of cash, huge cash flow), and there are no doubt worse places to hide.
- Two Key Industry Conferences In The Past Week – SMX Search Expo in Santa Clara, CA and Covario Search Conference in San Diego, CA (see 2/8/09 note). Combined, these provide broad reads into Search marketing trends.
- SMX Takeaways Consistent With Covario Summit Learnings – 1) ’09 Search budgets are broadly – tho not universally – expected to increase over ’08 levels; & 2) Q1 Search, however, WILL be weak, with the Retail & Travel segments (not surprisingly) seeing weakness but the Financial segment (surprisingly) seeing stabilisation, with select signs of February picking up from weak January.
- 1) ’09 Search budgets are broadly – tho not universally – expected to increase over ’08 levels; &
- 2) Q1 Search, however, WILL be weak, with the Retail & Travel segments (not surprisingly) seeing weakness but the Financial segment (surprisingly) seeing stabilisation, with select signs of February picking up from weak January.
- Findings From Authoritative SEMPO Report Suggest Search stabilisation – Released at the SMX conference, the Search industry survey report concludes that 1) Search marketers are looking for approx 9% spend growth in ’09, which is ahead of our GOOG 4% U.S. growth forecast; 2) 2/3rds of Search Marketers could tolerate further price rises, although we view CPC deflation as much more likely near-term; and 3) Search budgets continue to be poached from Magazine, Direct Mail, and Newspaper budgets.
- Findings From Advertiser Perceptions Survey Suggest GOOG Display Traction – The survey of over 1,200 online advertisers actually ranked GOOG higher than YHOO in terms of Display Ad Results and Customer Service and close to YHOO on several other Display metrics. YHOO’s challenges/distractions over the past several years have created an opportunity for GOOG Display advertising. And there is evidence of some success.
- Although Early, We Believe Competitor Checks Suggest Support For Our Q1 Ests – With GOOG, we are assuming 7% Q/Q net revenue decline in Q1 vs. the 7% and 10% declines we see implied in YHOO and IACI’s Ask guidance. Given the above datapoints and GOOG’s ongoing market share gains, our estimate would appear to safely include a worst case Q1 scenario.
- Reiterate Buy As We View Risk-Reward As Very Reasonable – Our $21 in ’09 non-GAAP EPS carries assumptions for modest Search growth, the beginnings of material non-Search revenue, and opex efficiencies that recent industry datapoints would appear to support. A close-to-trough 15X multiple would imply approx 10% downside ($315) while the average ’07-’09 multiple (25X) would imply approx 40% upside.
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