Google Is Generating Increased Analyst Optimism

| About: Alphabet Inc. (GOOG)

Following the first quarter earnings announcement on April 15, 2010, more than half the analysts covering Google Inc.(NASDAQ:GOOG) have made upward revisions to their estimates. The reason for the optimism may be traced to the strong results that were helped by the return of several big spenders, as well as the company’s growth prospects going forward.

First Quarter Highlights

Google’s first quarter earnings beat the Zacks Consensus estimate by 24 cents on revenues that exceeded by 36.8%.

Revenue growth was broad-based across search, display, mobile and enterprise segments, with particular strength in the retail, travel, technology and finance verticals. Both Google-owned and partner sites performed well in the last quarter.

The company continued to see higher click rates and lower cost per click, which dampened a bit by the Nexus One launch but continued to expand margins in the last quarter. This led to another quarter of solid cash flows, which netted $2.6 billion in the last quarter.

Agreement of Analysts

Of the 34 analysts covering the stock, 18 raised estimates for the upcoming quarter and 19 for the following quarter. Additionally, 23 analysts raised estimates for fiscal 2010, while 18 raised for fiscal 2011.

Analysts, by and large, continue to believe in the company’s strong growth prospects, driven by increasing broadband penetration and the transfer of offline ad spending online, which is expanding the online marketplace. Although Google’s market share could slip a bit, the company remains dominant in practically all the countries it serves, which is a big point in its favor. Additionally, Google is making headway with its mobile strategy and the company’s Android OS is taking share.

Despite Google’s strong growth prospects in the core markets, a few analysts have made downward revisions. For example, 8 analysts lowered estimates for the upcoming quarter, while 7 lowered for the following quarter. However, only 5 analysts lowered estimates for fiscal 2010, while 4 lowered for fiscal 2011.

The most significant negatives as we see them at this point are the stronger competition Google is seeing in its core search market, the fiercely competitive mobile market where it is pitted against companies like Apple Inc. (NASDAQ:AAPL)
, Research In Motion (RIMM) and Microsoft Inc. (NASDAQ:MSFT), challenges faced by Google News that resulted in its parting ways with News Corp and Associated Press, and the company’s exit from China.

The consensus, as evident from analyst agreement, points to stronger performance going forward.

Magnitude of Estimate Revisions

As may be expected, the strong agreement among analysts has raised estimates over the past 30 days. Accordingly, the Zacks Consensus estimate is up 13 cents for the upcoming quarter and 12 cents for the following quarter. Moreover, the Zacks Consensus estimate for fiscal 2010 is up 55 cents, while for fiscal 2011, it is up 81 cents.

Reiterate Neutral

We continue to believe in Google’s strong growth prospects, and the reason for our Neutral stand on the stock is investor sentiment.

We think that the company’s exit from China really hurt the shares and the clash of interest with big news providers remains an ongoing concern. Additionally, competitive pressures are intensifying and Google’s former invincible image has taken a bit of a hit. We believe this could limit upside over the next three to six months.