Sell-side reaction to Google earnings (2) David Edwards, AmTech Research (GOOG)

David Edwards, Internet analyst for American Technology Research,
analyses Google's (ticker: GOOG) Q2 earnings results; key extracts:

GOOG: Patience is a Virtue

Google reported very strong results for Q2. The company beat consensus estimates and our own estimates on the top line and bottom line. No matter how you look at it, the raw numbers were impressive. As we had anticipated, expectations were too high and the stock sold off in the after market. While we believe that the company's performance in Q2 met the buyside expectations (and was perhaps a bit ahead), management's strongly worded caution about Q3 did not meet the market's expectation of continued optimism looking forward.

Here's our take: We became cautious on Google in early June after the stock had run ~30% in four weeks, reaching our price target. At the time, we said that we didn't have enough conviction to raise our estimates and we advised clients to take profits. Now, after such strong performance in Q2, our confidence in the company's longer-term potential has increased. So, we are raising our FY05 estimates to reflect the outperformance in Q2 and we are raising our FY06 estimates to reflect our increased confidence in the long-term. As a result of these increased numbers, we are raising our price target to $350 which is 31x our 2006 EBITDA/share estimate on an EV/EBITDA basis.

Our thesis on Google remains intact: we are bullish on the market opportunity and on Google's potential to monetize market growth. At the same time, we remain cautious about Google's reliance on a single revenue stream and about the threat from Microsoft. We are encouraged by the fact that management provided some forward-looking commentary since we believe the company's policy to provide no guidance is a significant risk. We believe that the stock got ahead of itself in the past couple of months as the market seemed to believe that Google could do no wrong and would take over the world. We expect that last night's call will temper some of the over-optimism and believe that the after-market price below $300 is compelling. We anticipate that Google shares will continue to be volatile and encourage investors to be disciplined about taking profits as the stock runs and increasing positions as the stock dips. We continue to view Google as a "must-own" and believe that it should be a core holding in growth-oriented portfolios.

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