Citi analyst Mark Mahaney says his channel checks confirm that Google is indeed seeing a spending slowdown. Mark doesn’t think the fall-off is as severe as the horrific January Comscore report suggests, but the checks suggest that Comscore is at least directionally correct:
Based on exchanges with over 40 search industry participants – including several key SEM agencies at this week’s SMX Conference – we do not believe Google’s Paid Leads have descended to a No Growth Level. There are signs of weakness in Financial Services, Travel, and Real Estate, but no signs of material deceleration in other areas.
Mark cut his Google estimates and price target (now $625) but maintained his buy. We find some but not all of his optimistic logic persuasive (Mark’s arguments in black; our comments in blue):
We Are Reiterating Our Buy Because:
1) We believe the long-term growth opportunity for Net Advertising & Search is still well intact;
Agree, but as one of our favourite strategists is fond of saying, when fundamentals start accelerating downhill, investors don’t usually look across the valley to the other side.
2) Google is clearly taking share in Core Search
True, but irrelevant to stock price. Also, Google now has so much share that there’s actually relatively little left to go.
3) Google is also staking out leadership positions in newer areas such as personalised Search;
Irrelevant to stock price.
4) GOOG shares do not accurately reflect option value re: Display/Video & Mobile Advertising;
Not sure we agree with this–Google investors seem quite excited about Video, at least, and we still haven’t been convinced that Mobile Advertising is ever going to finally live up to its hype.
5) GOOG’s current valuation implies a very reasonable risk-reward outlook;
Agree that downside now finally limited. Not sure upside really that spectacular, though. Is Google going to, say, double in next year? Seems hard to believe with search product cycle winding down, video/display/mobile cycle still embryonic, and economy heading into tank. But perhaps Eric will pull display switch and throw a few billion straight to Google’s bottom line.
6) We see two potential near-term catalysts: EU approving DoubleClick deal and confirmation that Google won’t have to fork over $4.6 billion in the wireless auction.
Disagree that these are catalysts. We think both have been discounted in the stock.
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