Google's Leading the Online Advertising Game - But There's Still Room to Grow

Brian Bolan, research analyst at Jackson Securities, sent a note to clients revising Earnings estimates for Google (GOOG). Key excerpts follow:

Company Description

Google is an internet search and technology company that has established itself as the leader in its growing market. Free downloads of applications, tools and other products have helped to fortify the brand which has come to stand for something more than just a search engine.

Valuation and Recommendation

As a leader in a growing market, we see many opportunities for Google to grow revenue, earnings and market share. We continue to recommend investors BUY shares of Google.

Summary

We are raising our earnings estimates for Google due to the superb execution the company posted over the most recent two quarters. Data trends and changes in the broader landscape have been factored into our estimates.

Earnings

We had previously estimated that Google would earn $3.47 a share on $3.76B in revenue in 2Q07. Our new estimate of $3.93 per share on $3.89B in revenue for the same quarter. The consensus EPS number of $3.56 is considerably lower than our estimate, but this could be due to our adjustment in the tax rate. The company has guided over the last two quarter to a rate of about 30% and come in significantly below that. We have moved our estimated tax rate to 26% from 29.9% to reflect this.

We are raising our TAC (traffic acquisition cost) estimates for the quarter and the year from 81% of network revenues to 84% of network revenues over the next two quarters and 85% in the fourth quarter.

Valuation

Previously, we believed a 39x multiple for Google was appropriate given its growth and consistent out performance of earnings. The 39x multiple landed us at a price target of $560, which we are maintaining today. In looking forward, the landscape is set to change due to the number of large acquisitions in the space. The DoubleClick acquisition by Google, the aQuantive (AQNT) deal and its large price tag incurred by Microsoft (MSFT), and the purchase of 24/7 Real Media (TFSM) by the WPP Group (WPPGY) all show how quickly the game can change in the online ad world.

At the current price of $470 a share, we believe that Google represents a significant value. Our earnings estimate for the year of $16.47 is easily the highest on the Street, so due to our aggressive stance on the rest of the calendar year we are holding back on adjusting our price target at this time.