THE GOOGLE INVESTOR: Stock Slammed After Quarter Disappoints Wall Street

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GOOG clobbered. Google’s quarter was solid, but below what some investors were looking for, so the stock is getting hammered in the market today.  It’s down 5% to around $567. At these levels, the stock trades at approximately 20x 2010 EPS and 18x Enterprise Value / EBIT. Google’s search business continues to recover from the recession, and it will probably drive solid growth for the balance of the year.  However, that business is maturing, and the company has yet to develop a second major growth engine.

Google Reports Solid Quarter, Nothing To Write Home About (Business Insider)
Henry Blodget and Rory Maher at Business Insider take an in-depth look at Google’s earnings. Bottom line, the company posted a solid quarter, in line with expectations. Revenue was slightly above consensus, as was EPS and both in line with whispers (apparently investors were hoping for more). Paid clicks and revenue-per-click both grew nicely, up 15% and 7% respectively, but the latter disappointed investors. Cash flow continues to be astonishing, and Google now has a dizzying $27 billion of cash. Overall, Google is still robustly healthy, but the core business is maturing and the company has yet to develop a second major growth engine. 

Wall Street Bulls Believes Stock Sell-Off Overdone
Analysts weigh in on the quarter. If you missed the conference call, a full transcript can be accessed here.

  • Mark Mahaney (Citigroup): Reiterates Buy rating and believes the risk-reward is attractive at these levels. Mahaney believes the shares still don’t anticipate: 1) cyclical recovery in markets outside the US; 2) material contribution from mobile, video, and display segments; and 3) innovation and monetization potential within core search.
  • Spencer Wang (Credit Suisse): Maintains Outperform rating and $700 price-target. Results were consistent with his cyclical ad recovery thesis and positive long term view on search growth. Potential positive catalysts include strong momentum for Android and closing the AdMob acquisition.
  • Jeetil Patel (Deutsche Bank): Patel reiterates Buy rating and raises his price-target to $700. He believes concerns on China, iPhone and operating expenses are overblown and thinks the company is gaining share in paid search and display ads while showing profit improvement.
  • James Mitchell (Goldman Sachs): Mitchell maintains Buy rating while increasing his price-target on adjusted earnings to $680. He believes that quarterly results illustrate the strength of the Google franchise. Mitchell attributes the stock price decline after-hours to “too-much-information syndrome, with investors seizing on any negative data points.”
  • Mary Meeker (Morgan Stanley): Meeker reiterates Overweight rating with a price-target of $665. While Mary is disappointed by the cost-per-click trend (down 4% sequentially), she is encouraged by: 1) paid click growth acceleration; 2) traction from newer non-search businesses; 3) underlying technology upgrade cycles; and 4) ongoing share gains.
  • Brian Pitz (UBS): Reiterates Buy and $700 price-target as the company continues to take search share, while display and mobile are becoming increasingly material to overall results. Pitz remains bullish on the company’s cyclical and secular growth and believes the sell off is unwarranted. Brian would use the after-market pull-back to add to positions.

Stock Getting Hammered Because Of Costs Associated With Hiring Spree (Market Watch)
MarketWatch’s John Letzing believes the sell off of Google stock is due to the company plans to go on a hiring spree. While revenue and EPS were generally inline with expectations, costs grew at a more rapid rate than analysts anticipated.  Increased costs due to hiring could impact margins if not offset by corresponding revenue growth. A worry on the street. We would argue that aggressive hiring and investment not only signals a rebound in the job market but a commitment to new business, which will likely help the company diversify in the long-run.

Vulcan Value Partners Believes Google, The Value Stock, Is Undervalued (BusinessWeek)
C.P Fitzpatrick of Vulcan Value Partners tries to find companies that are trading at a 20% discount or more. While the value money manager is not a fan of owning tech stocks, he owns Google. He likens the search giant’s innovation to that of FedEx. People all over the world say “FedEx it,” instead of mail it. Now people all over the world are saying “Google it” to find answers. As such, “Google has an incredible franchise value” and C.P. believes the stock is “undervalued”. What other company can grow its bottomline double-digits throughout a recession?

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