GOOGLE DOWNGRADED!

Larry Page and some suits

Photo: Keith Powers

After last night’s earnings report, Mark Mahaney at Citi is downgrading Google to Hold, saying the company is a “show-me story” now.The earnings were essentially solid, but Mahaney writes that rising operating expenses, “with limited management disclosure suggests lack of discipline in a growth/competitive environment that simply isn’t as open-ended as it was for GOOG prior to the Recession. Hence the Downgrade.”

Here are his bullets on Google:

  • Mixed Fundamental Trends – Organic Y/Y Gross Revenue growth (excluding FX & Hedging & Nexus One) of approximately 28% was right in-line vs. Q4’s 28% (despite a 4 pt tougher comp) and was the highest growth since Q2:08. But EBITDA margin of 55.5% (vs. our 57.4% est.) was down 590 bps Y/Y and 350 bps Q/Q. This translated into 16% Y/Y Operating Income growth – the lowest ever for GOOG.
  • Estimates Largely Unchanged; PT Reduced to $650 – ’11 EPS remains $34.50 (up 16% Y/Y) on raised Rev and Opex assumptions. $650 PT = 16X ’12 EPS of $40.68.
  • There Were Several Clear Positives… – 1) Strong Revenue trends in both the U.S. and in International markets; 2) Strong Core Search metrics – 18% Y/Y Paid Click growth & 8% Y/Y CPC growth; & 3) Clear signs of continued diversification into Mobile, YouTube, and Display Ad Network high-growth Revenue streams.
  • But This Is What Makes GOOG A Show-Me Story – 1) The returns on GOOG’s prior investments (Mobile, Display) have been very good, but the returns on GOOG’s new investments (including Local and Social Search) are uncertain; 2) The dramatic ramp in opex, with indications of more of the same going forward; 3) The not inconsistent loss of senior management talent; & 4) The increasing regulatory scrutiny of the company, which at some level limits strategic options. We believe GOOG is likely to be range- bound (call it $500 – $600 or 14X – 17X ’11 P/E) for the foreseeable future.

Don’t Miss: 8 Products Google Should Kill

NOW WATCH: Tech Insider videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.