Seeking Alpha
Long-term horizon, growth
Profile| Send Message|
( followers)  

Summary

  • Based on consolidated equity research targets & ratings, the research analysts covering Google have not made material price target changes in several months.
  • The equity research firms on Wall Street have a much larger impact on stock prices than most realize; they should be used as a tool to read market swings.
  • The most up to date EPS estimates and targets see Google hitting target prices in the $600 range, while the older EPS estimates see a $550 target price range probable.
  • There is a good chance that the research firms highlighted in this article may increase their target prices and EPS estimates before Google's second quarter earnings.

Introduction

Based on consolidated equity research targets & ratings, the research analysts covering Google (GOOG, GOOGL) have not made material price target changes in months (the mean target price across 46 equity research firms has not changed since January-February 2014 after months of price target increases), however, interestingly, the most up to date EPS estimates and targets see Google hitting target prices in the $650 range, while the older EPS estimates range in the $550 space. The highest price target is set by Morgan Stanley equity research at $645 by the end of 2014, which was also one of the most recent targets updated.

Below is a chart of all equity research analyst targets & ratings for Google (buy/sell distribution) with an overlaid target price vs. actual market price line chart. Interestingly, equity research analysts have not made any price target changes for months following constant target price increases for years (look at the dotted line). The dotted line represents the mean target price for 36 of the major equity research firms covering Google. All sources are as of May 2014, sourced from over 50 different equity research firms (some firms did not have target price guidance but offered specialized subject matter expertise and EPS estimates in various businesses Google operates in).

Google's Target Price & Rating Research Distribution

(click to enlarge)

Source: FactSet, Edgar Filings, IBES, Independent Research Firms

Based on the data aggregated above, the mean target price (across all the major equity research analysts included in the above chart) has locked on $660.64, while the stock currently trades in the $560 range. Interestingly, the price targets haven't changed, but the number of research analysts issuing "Strong Buys" has increased from 30% of the total targets in January 2014 to 33% in June 2014, and the number of analysts recommending "Buy Ratings" has been flat in the same period. Additionally, there are no recommendations below "Hold Rating" issued by research analysts, which is generally uncommon for coverage of a single company, but not uncommon in the technology sector for a single company (especially if it has great growth potential).

The equity research firms on Wall Street have a much larger impact on stock prices than most realize. For most readers, research analyst targets mean absolutely nothing, but that is a bit shortsighted and I will explain why. It's easy to find an undervalued, or overvalued, market opportunity and invest in the "right price," but it is extremely difficult to identify undervalued/overvalued opportunities and have the market react to the same opportunity after execution. The general investment manager and hedge fund hold several investment discussions with equity research analysts to mainly identify overlooked technical details (think potential acquisition targets, competitor advancements, video market statistics, etc. in Google's case), or in many cases to get a different view on an investment idea (both bullish or bearish, since most portfolio managers will go long and short several stocks at a time), before committing capital to the trade. So like it or not, equity research analysts have a significant impact on security market prices especially when you have equity research firm clients investing several million dollars at a time (even when the research analysts are completely off with their projections).

2014 EPS Estimate Distribution by Research Firm

(click to enlarge)

Source: FactSet, Edgar Filings, IBES, Independent Research Firms

The chart above distributes EPS estimates over and under the mean EPS relative to Google's 2014 price targets charted earlier (the mean EPS estimate for Google across 46 research firms is $26.78 for 2014 as of May 2014). At the higher end (far right), Morgan Stanley updated EPS estimates in May 2014, forecasting EPS growth to be around 31% year on year (by December 2014), upping its target price to $645 for 2014. At the lower end of the distribution, BMO Capital Markets sees Google hitting a year-on-year growth of 15%, with a target price of $525 (expected by December 2014) updated in April 2014. Based on the data, it looks as if the EPS estimates are somewhat balanced, but that looks a bit illusory, since Morgan Stanley and Telsey Advisory Group have skewed the distribution a bit since their EPS estimates are much higher than the rest of the 46 EPS estimates included in this study. So, when analyzing this distribution set, note that the mean EPS estimate is skewed by the more bullish research analysts, while the majority of the research analysts have a more conservative view on Google's performance for the year.

2014 EPS Estimate Distribution History

(click to enlarge)

Source: FactSet, Edgar Filings, IBES, Independent Research Firms

The chart above shows EPS Estimate changes overtime, which shows an interesting picture; unchanged EPS Estimates in June 2014 with no increases or decreases (so far), which is a bit surprising since the first quarter of 2014 included a variety of changes in estimates and second quarter results are right around the corner.

Conclusion

This article is not meant to sway current or prospective shareholders from increasing or offloading positions in Google, but to serve as a market positioning tool to understand why shares may be trading at their respective levels by understanding what the bigger players might be doing (Investment Managers, Hedge Funds, etc.). It is critical to understand all the market participants in any given stock because great investment ideas sometimes take years to play out and it could be as simple as one portfolio manager holding off on an investment who regularly communicates with his or her chosen equity research analyst that is not signaling a buy or sell recommendation for that stock.

Finally, I would like to discuss what all this could mean in the upcoming months before and during second quarter earnings season. Based on the data, the most up to date EPS estimates and Targets see Google hitting target prices in the $600 range, while the older EPS estimates see a more $550 target price range as likely. Based on how analysts price in market data and knowledge, there is a good chance that the research firms highlighted in this article may increase their target prices and EPS estimates before second quarter earnings (it will take some time, maybe about 4 weeks, which is well before earnings announcements, before updates hit the newswires). As a final note, hopefully readers found this data helpful since it lays out where Wall Street sees Targets and EPS estimates for the year.

Source: Wall Street Will Up Google's 2014 Target Price Before Second Quarter Earnings