Google is getting another slap on the wrist from Wall Street.
Oppenheimer is lowering its price target on Google to $650 from $715, but it’s maintaining an “outperform” rating.
Morgan Stanley also lowered its price target to $645 from $750 and taking it off its “best ideas” list.
Earlier we wrote about Citi downgrading Google to hold, but keeping its price target the same.
All of these analysts seem to be trying to have it both ways with Google. They’re saying they’re worried about the near future of Google, but they’re on board with the company for the long run.
The big problem is the new management regime. Larry Page took over, reorganized the company, and then didn’t explain what was going on last night on the earnings call, leaving Wall Street in the dark.
At the same time, operating expenses rose, and Google yet again failed to establish a real strong secondary business.
At a fundamental level, Google is well positioned to generate more revenue as search continues to grow, the mobile market grows with Android leading, and YouTube gets stronger and stronger. So, it’s not like analysts can just throw in the towel on the company.
Still, there’s a good chance Google will trade sideways as investors try to sort out what’s happening with the new leaders of the company. And as they wait for the non-search businesses to deliver results.
Here’s Morgan’s summary:
Investment Conclusion: Although we believe Google Instant has delivered revenue upside, several challenges overshadow this strength. We think investors will now focus on management changes, near-term margin declines, intermediate-term regulatory risks, and long-term competition – quite a wall for a stock to climb. The key CQ1 confirmation is that margin expectations have been reset to a new, lower level. We maintain our OW rating but lower our forecasts and cut our target price to $645, removing Google from our Best Ideas list.
Following much weaker than expected 1Q margins, we are lowering our price target to $650 from $715, but maintaining our Outperform given implied 20% upside potential from the after-hours trading level. While revenues increased 29% y/y, 3% above Street, we believe investors will focus on the 60% y/y increase in expenses. Drivers were a 27% headcount increase, 10% wage increase, higher marketing to drive Chrome and search spending, legal and real estate expenses and 1Q benefit accruals. While the newly appointed division heads provided helpful data points, suggesting a focus on revenue growth, “Non-Search” spread declined from 4Q, suggesting less diversification. Although 1Q should mark the high-point of expense growth, Google’s now a “show me” stock until spending decelerates.
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