It’s inevitable: When you’re banging the drum on a stock and all it does is hit you on the head with a two-by-four day after day you eventually get discouraged. (Don’t we know it.) No Google bull has truly capitulated yet, as far as we know, and we’re still seeing a parade of dreamy price targets in the high $400s. But the tone has changed.
Mary Meeker, Morgan Stanley
Summary Outlook: NO CLUE
Forecasting is more of a moving target than we have ever experienced.
Intel’s big negative surprise on Wednesday eve implying -16% Y/Y revenue
growth for CQ4E (the worst Y/Y trend since CQ4:01) and -12% Q/Q growth
(perhaps the worst growth ever for Intel’s seasonally strong CQ4) is
the speediest / most draconian negative adjustment driven by consumer
fundamentals we ever recall seeing.
Current industry commentary related to Google tends to reflect a weak
October with a basic mindset adopted by many of flat-lining last week’s
business trends – subsequently there seems to be almost no expectation
of an end-of-November / beginning-of-December seasonal uptick factored
into current thinking. It’s notable that the four weeks ending
mid-December often account for the largest portion (perhaps 40-60%) of CQ4
While we don’t know for sure if consumers will celebrate Christmas with
gifts, or not, we do know – to paraphrase ‘Crazy Eddie’ – prices will
seem insane. Unlike previous nasty recessions, consumers will have the
ability to search and find great prices online. The question is not
whether they will search and shop(or in Google parlance – click and
convert), it’s how much they will buy.
General industry commentary, for the moment, seems to assume flat Y/Y
online ad spending in 2009 in what will likely be a down year for
overall advertising spending. Assumptions, for now, imply search (45-50% of
online ad spend total) should gain share and grow at 5-15% Y/Y with
display / other online advertising declining by 10-15%.
Commentary we have heard regarding sequential CQ4E search spending /
cost-per-click (CPC) trends falls into three categories, ranking in order
of volume: 1) big brands – search / CPC tend to have upward bias; 2)
mid-sized businesses – mixed; 3) local – down. Data we have seen
regarding sequential search traffic imply modest growth.
Mark Mahaney, Citi
Summary Outlook: DEAD MONEY FOR A WHILE
# Per our note published this morning, “GOOG: Lowering Estimates On Negative ‘Net EPS Datapoints” we believe there are no near-term catalysts for the stock. Hence, we are removing GOOG from Top Picks Live (TPL) as our favourite Large Cap Internet idea.
# Why Now? Given Weak ‘Net EPS Datapoints, We’ve Cut Our Estimates – Since GOOG’s Q3 on 10/16, Internet Q3 EPS datapoints have been very negative. The growth rate for Online Advertising is likely to slow materially in Q4 for the top four ecommerce companies (AMZN, EBAY, EXPE, PCLN) – from an average of 25% Y/Y growth in Q3 to 8% Y/Y in Q4. At some level, GOOG will be impacted as overall marketing budgets are slashed and search budgets are highly scrutinized. As a result, we’ve reduced net revenue by 3% to $4.16B, up 3% Q/Q; and reducing EPS by 3% to $5.03. Flowing changes through to our ’09 estimates, we’ve reduced net revenue by 5% to $17.46B, up 11% Y/Y and reducing EPS by 5% to $21.18.
# Pushback/Concerns – At 7.6x our ’09 EBITDA and 16.1x our ’09 GAAP EPS, GOOG is tradingbelow historical levels. However, given weak Q4 retail expectations and ad budgets (including search) shrinking, we believe there are no near-term catalysts for the stock.
# Bottom Line – Unprecedented macro environment trumps all. BUT, our Long-Term Long Thesis for GOOG still remains intact. Also, GOOG is showing some recessionary insulation – Search is gaining share. And a market that is indiscriminately selling High and Low Quality ‘Net stocks is setting up High Quality stocks for eventual outperformance.
Doug Anmuth, Barclays
Summary Outlook: MAYBE SOME HOPE
While Google has typically not been a FCF story, we think FCF will become more of a focus over the next couple quarters as capex is likely to moderate, potentially providing some near-term support for shares.
- While opex cost controls have received more attention, we think GOOG is focused just as much or more on capex spending, not just bc of the existing slowdown, but bc GOOG has likely reached a point of meaningful over-capacity, thereby enabling it to moderate spending w/o impacting the user experience.
- GOOG currently trades at 16x 2009E FCF of $5.7B, or 6% yield. This FCF multiple may not seem particularly cheap relative to some other names (i.e. AAPL), & we don’t claim to know exactly what cheap means in the current environment, but we think GOOG’s FCF can grow 20% in 2009 & 16% annually 2008-2011.
- GOOG P/FCF to 3-YR growth = 1.0x vs. 1.2x for AMZN & 2.5x for both YHOO & EBAY.
- We also think there is some evidence to suggest that shares may perform better during/just after periods in which rev growth >capex growth i.e. mid-2007 & perhaps mid-2005.
Youssef Squali, Jefferies Rating: BUY Summary Outlook: FUNDAMENTALS HORRIBLE BUT MAYBE SOME HOPE LONG TERM
Google 4Q and FY09 results should be negatively impacted by further deterioration in commerce and ad demand in the seasonally strong 4Q, prompting us to lower our estimates for the third time in two months. We remain bullish on the stock long-term given the mkt opportunity and a 14x P/E.
Based on Oct. data and checks with several industry insiders, we’re lowering our FY08 rev. and NEPS estimates to $15.7B and $19.39, from $15.9B and $19.62, respectively. Our new FY09 estimates are $17.5B and $21.26, well below consensus of $19.1B and $22.63. Our PT goes to $420 from $551.
Youssef SqualiSandeep Aggarwal, Collins Stewart
Summary Outlook: LOUSY BUT WILL SOMEHOW SOAR EVENTUALLY
¡ We are now assuming flat CPC growth Q/Q for Q4-08
We are cutting our estimates for Google due to further weakening of retail and advertising environments and the resulting CPC pressure dilemma. Our Q4 net revenue now implies 5% Q/Q growth on constant currency basis and 2% Q/Q on FX adjusted basis and ’09 implies 20% net rev growth. We believe that the high CPC inflation Google has been experiencing for the past 6 quarters is not sustainable and will pressure core search growth in Q4-08 and ’09. Though in the current economic environment search budgets are still holding better than perhaps any kind of advertising categories, the sponsored clicks growth started to slow down in Q4-07 and starting from Q3-08 we witnessed the slowing CPC growth. However, Google is currently trading at 13.6x our ’09 PF EPS and 7.5x our ’09 EBITDA and can provide material upside in the event of even a modest recovery in the macro economic outlook.
¡ The CPC dilemma at Google
In our view, the prior CPC hikes Google achieved were a function of two factors – 1) bid density (number of advertisers for a keyword determined the CPC) and 2) quality scoring (higher minimum bid for low quality keywords). We think that due to a weaker economy bid density is now getting affected and quality scoring by nature has diminishing marginal returns. As per our estimates, going forward bid density will deliver 2%-4% Y/Y lift in CPC and quality scoring perhaps 1%-2% vs. average of 6% Y/Y each for the past six quarters.
¡ In spite of headwinds GOOG can outperform ‘Net ad market
During our conversations with several advertisers and media buyers we have been hearing that overall ad budgets continue to come down but ‘Net ad continues to see secular growth trends, albeit at a lower pace. Advertisers/media buyers continue to find Search to be the most compelling online ad format. In our view Search will very likely outperform the overall ‘Net ad growth and a modest market share gain by Google means GOOG can be one of the fastest growing online ad companies.
¡ Our new vs. old estimates
For Q4-08 we are at net rev of $4.26bn (prior $4.37bn), adjusted EBITDA of $2.54bn (prior $2.58bn), and pro-forma EPS of $5.10 (prior $5.21).
¡ How do we break down Google’s top-line growth for 2009?
Our ’09 net revenue growth of 20% assumes 15% growth in core search and 5% growth in non-core search i.e. mobile Internet ($250mm incremental), YouTube ($200mm incremental), Google Apps ($175mm incremental), & DoubleClick ($90mm incremental).
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