Larry Page and some suits

[credit provider=”Keith Powers” url=”[email protected]/701215001/sizes/z/in/photostream/”]

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.

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