Google Proves Mortal: Opportunity Knocks?

So, there are a couple of ways to think about Google’s (GOOG) big post-Q2 sell-off this morning. For starters, as I noted last night, there seems to be increasing evidence that online advertising is actually feeling the effects of the slower economy. One quarter earlier, the company had denied that it was feeling the effects of the macro slowdown, but that no longer seems to be the case, and the Street is adjusting its perceptions of the company accordingly. On the other hand, the legion of analysts with Buy ratings on the stock almost universally believe investors are being given an opportunity here to buy the stock on the cheap.

It is also worth noting that the big reason for the EPS miss in the quarter was not the weaker economy, but rather lower interest income, as the company used a substantial chunk of cash to pay for its acquisition of DoubleClick. While that’s a non-operating factor, analysts are adjusting their models for lower interest income going forward, so even some of the bulls are reducing earnings estimates as a result.

The big issue here is not really the EPS miss; it is the revelation that Google lives here in the real world with the rest of us, where businesses of every stripe are cutting back on spending in many areas - including online advertising - in response to a rough macro environment. The Internet, while an alluring advertising medium in so many ways, turns out not to be impervious to economic malaise. But here’s the good news: if you believe in Google’s long-term promise, the stock today just went on sale. Maybe you ought to stock up.

Here’s a look at some of what the Street is saying about GOOG this morning:

• Rob Sanderson, American Technology Research: He maintains a Buy rating, but cut his target to $725 from $750. Sanderson writes that “the macro environment is uncertain and becoming more challenging,” but that the pull-back in the stock “offers a great entry point.”
• George Askew, Stifel Nicolaus: He reiterates a Buy rating and $675 target. He trimmed estimates to reflect the lower interest income; for 2008 he goes to $20.20, from $20.74; Q3 goes to $5.11 from $5.28. But he contends that the sell-off is not warranted, and views the chance to buy the stock under $500 as “very attractive.”
• Mary May, Needham: Buy rating and $690 target maintained. “While our intra-quarter data points had led us to expect better results, we were nonetheless still impressed with the quarter considering the economic environment,” he writes. Remains his top Internet pick.
• Derek Brown, Cantor Fitzgerald: Maintains Buy rating, but cuts target to $675 from $750, and trims estimates. “While Google remains one of the best-positioned companies in the technology sector and the linchpin to the Internet economy, in our view, these results appear to suggest that it not, in fact, entirely immune to broader macroeconomic headwinds,” he writes.
• William Morrison, ThinkPanmure: He cut his rating to Accumulate from Buy, and reduces his target to $550 from $650, citing “concerns over the impact of a slower economy on Google’s business.” Morrison says he is incrementally more cautious, given management’s acknowledgment of “isolated pockets of weakness in its core search business,” the fact that Google won’t be immune to the downturn and a belief that sell-side estimates for this year and next year are too aggressive.
• Douglas Anmuth, Lehman: Keeps his Overweight rating and $620 target. Anmuth asserts that the sell off is overdone, and asserts that the company is better insulated than other Internet players from the macro issues due to “the success-based, ROI-driven nature of search.”
• Ross Sandler, RBC Capital: Keeps his Outperform rating and $600 target. “Search is proving to be the most recession-resistant advertising medium, but we do not believe GOOG is totally immune, particularly if the second half environment continues to deteriorate,” he writes.
• Jeffrey Lindsay, Bernstein Research: He maintains his Outperform rating, but cut his target to $700 from $765. “Given the current macro environment, and the fact that the second quarter is typically the weakest from a revenue growth perspective, we thought this was actually a good performance,” he writes. “Unfortunately, more than a few investors did not agree.”
• Gene Munster, Piper Jaffray: He keeps his Buy rating, but trims his price target to $806 from $819. He contends the quarter was essentially in line with the Street, and is responding more to the company’s comments on the more challenging economic environment, noting that this is a change from Google’s previous position. He thinks the stock trades sideways until September, but rallies from there.

Google before lunchtime is down $48.03, or 9%, to $485.41.

Comments

[mkreisel:]

480 is not cheap in this economic and stock market environment.

2008 Jul 18 01:01 PM

[VSD:]

Goog will not make $20/sh in earnings in 2008 unless it report spectacular quarters for rest of year. It will face a multiple contraction.

2008 Jul 18 01:53 PM

[Calvin C.:]

I'm looking for an entry point <450

2008 Jul 18 02:11 PM

[Bob Gary:]

I can't help but to remember what happen to Yahoo a few years back. Same thing will happen to Goog once the growth subsides.

2008 Jul 18 02:49 PM

[Chris Lau:]

I just wonder if i am the only one who isn't really to impressed with their adsense. Sadly, investors will soon realize throughout the current quarter that goog might just be another ad company, and in bad times, ad spending will be scaled down.

2008 Jul 18 04:49 PM

[JBD:]

I expect PE contraction and Google to ease down to $400 or the high $300's. At that point it will be an ok buy..... but I think the company is loosing focus, advertising on the net is flattening out, and the law of large numbers is starting to kick in. Don't expect the same returns in the future as the past.

2008 Jul 18 10:34 PM

[noni1:]

To my knowledge, shortselling is illegal in Europe. If the European markets can do without shortselling, so can we.

We need to permanently ban all shortselling of any kind, forever. If people want to profit from the decline in the value of a stock, but a put option like they do in Europe.

Market Makers have provided ENOUGH liquidity. Shortsellers now and always have diabolically caused fear, uncertainty and doubt along with an erosion of confidence in investing in stocks at all. If they had their way, all stocks of all companies would be worth zero

2008 Jul 19 12:36 AM

[metalhead:]

Anyone buying GOOG here is making a big mistake. Former leaders of past bull markets never return to their old glory. Don't believe me - read Bill O'Neill's (of Investors Business Daily fame) "The Successful Investor."

Low 400's next stop.

2008 Jul 19 10:40 AM

[Ames Tiedeman:]

This is going under 400. Short this on any rally. Stay away from the long side. The party is over. 33% growth does not support this price. Wait until growth slows to 20% and watch it get crushed. Under 100 someday? Probably.

2008 Jul 19 01:26 PM

[Birdfan:]

I'll buy at 375

Free Stuff

2008 Jul 19 10:01 PM

[investor88:]

Good article by Eric and discussion on Google. Investing is science and art. I am on balance more inclined to vote for the negative view of google price action in the medium term on valuation grounds in the midst of great uncertainty in the stock markets.

2008 Jul 20 11:54 AM