Shares of Google (GOOG) are up $44.64, or over 6%, at $747.51 following the company’s Q4 report last night, which included revenue lower than analysts had been expecting but higher profit, and search advertising results that reassured investors.
A quarter-to-quarter rise in Google’s “cost per click” fee for advertising, in particular, offset the 6% year-over-year decline, reassuring some investors that despite greater volume of mobile advertising, which comes at a cheaper rate, the search business is not collapsing.
The weakest part of the report was the Motorola unit, which makes smartphones and set-tops. Google is selling the set-top portion to cable equipment supplier Arris Group (ARRS), but the smartphone results offered last night suggest that part of the business is “free fall” as one analyst put it today.
Analysts were adjusting estimates today, in some cases raising Google’s profit per share estimate, on an adjusted basis, to account for brighter prospects in the search business, while at the same time cutting their revenue estimate to account for the sale of Motorola’s set-top operations.
Bullish!
Daniel Salmon, BMO Capital: Reiterates an Outperform rating on the shares and cuts his price target to $790 from $800. “We believe positive stock reaction after hours was in response to stabilization of CPC declines; as important to us, it says that the market is increasingly comfortable with secular online ad price pressure across the industry and it is now changes in the rate of decline that is in focus. The simple view focuses only on mobile mix shift and misses the effect of things like programmatic buying or the lack of industry supply constraints. With the CPC issue now on the back-burner (until another second-derivative inflection point of course), Google�s leadership in multi-screen IP advertising should
hopefully shine through, helped by data points like the fact that Global 100 advertisers doubled their spend on YouTube this year. Potential catalysts include: 1) positive Motorola hardware sentiment going into 2H13 (when the pre-GOOG pipeline begins to wash out), and; 2) positive impact of the new ads-included YouTube app for iOS. Likewise key risks are: a) Amazon�s moves into ads, and; b) potential international tax changes.” Salmon cut his 2013 revenue estimate to $49.57 billion from a prior $49.91 billion, and cut his EPS estimate to $46.50 from a prior $47.
Anthony DiClemente, Barclays Capital: Reiterates an Overweight rating on Google shares and raises his price target to $850 from $800, “The strength of core Google�s quarter pleasantly surprised us as paid click growth was buoyed by traction for mobile and Android, emerging markets clicks, and the positive impact of Google�s web services offerings [...] Web services will be critical going forward as the distinction between hardware is becoming less meaningful. GOOG continues to build upon its web services ecosystem, and new products such as next-gen Nexus devices, Android-enabled appliances, and driverless cars, as well as Google Play expansion, should all complement GOOG�s core competencies such Search, YouTube, Android, Chrome and Google Maps, driving better user data, and continued strong ad revenue growth.” DiClemente cut his 2013 revenue estimate to $48.19 billion from a prior $51.85 billion, and raised his EPS estimate to $46.29 from $46.25.
Michael Graham, Canaccord Genuity: Reiterates a Buy rating while raising his price target to $830 from $810. “Google reported solid results that were essentially in line with consensus and prompted a sigh of relief from investors nervous after a few bumpy
quarters. We lower estimates very slightly on higher TAC. We believe Google stock can continue to drift higher, with the next key question being whether better pricing, PLAs, and Display can help Google Sites growth inflect upward.” Graham cuts his 2013 revenue estimate to $47.96 billion from $49.39 billion, and cuts his EPS estimate to $46.03 from a prior $46.37.
Evan Wilson,Pacific Crest: Reiterates an Outperform rating and raises his price target to $820 from $795. “Google�s Q4 metrics helped calm the biggest GOOG bear case: that all-things-mobile were eroding its financial position. Three things stood out: (1) Nexus sales did not derail Google core margins, (2) TAC was steady as a percentage of sales and (3) CPC grew sequentially. We continue to think mobile worry could fade and start to look like last year�s bear case [...] We are reducing our forecast for Nexus in Q1 by 1 million units, and we think margin pressure from Nexus sales on Google Play should be even smaller in Q1. This adds $0.20 to our Q1 EPS estimate. We are maintaining our 2012 Nexus unit estimate. The reduction is due to a product transition we expect in Q2 around Google I/O in May.” Wilson cut his 2013 revenue estimate to $49.52 from a prior $52.85, while raising his EPS estimate to $46.20 from $45.20.
Bearish!
Justin Post, Merrill Lynch: Reiterates a Neutral rating and a $780 price objective. Google non-GAAP margins at 45% were below our 47% estimate, and Motorola remains sloppy, with -10% margins ex-Home sales. In summary, we see 4Q as a generally in-line quarter, with the after market move likely a relief rally given last quarter�s miss, the well telegraphed Motorola miss and Google�s propensity to disappoint on 4Q results [...] US revenue growth at 20.3% decelerated from 22.5% in 3Q, and was likely aided 300-400bps by Nexus 7 sales (in each quarter) [...] We continue to expect uneven results (driven by the mobile and Google Product Search transitions) and decelerating PC revenues to keep stock range bound in 1H’13 (our top idea is Facebook). We believe Google could be a better stock in 2H’13 with mobile CPCs improving, Google Product search maturing, and better visibility on Motorola products.” Post
James Dix, Wedbush: Reiterates a Neutral rating, while raising his price target to $770 from $740. Although Dix “continues to have a positive bias on the shares,” nevertheless he cites several concerns: “Although TAC/ad revenue was slightly lower than expected, perhaps easing some concerns about pressure from distribution costs on mobile platforms (tablets as well as smart phones), Google Business pro forma operating margins missed our estimates again. Even adjusting for ~90bps drag from MMI intangibles amortization, Google Business margin of 35.2% missed our 36.4% estimate, and was down ~300bps y/y. This is bigger than the ~200bps y/y compression in 3Q (again, adjusting for intangibles amortization), and the minimal margin compression which Google Business saw in 2Q12. Management continues
to warn of quarterly volatility at Motorola Home business, as company works through existing product pipeline and ramps investments in new products.” Dix raised his 2013 revenue estiamte to $48.29 billion from a prior $48.22 billion, and raised his EPS estimate to $46.84 from a prior $46.49.
Heather Bellini, Goldman Sachs: Reiterates a Neutral rating but raises her price target to $700 from $680. “All in, we believe the quarter was good but not enough to change the debate around the company�s revenue mix impacting both its gross and operating margins going forward. We continue to remain on the sidelines and prefer Facebook (FB) over Google.” Bellini cut her revenue estimate this year to $47.81 billion from $51.7 billion, and cut her EPS estimate to $45.35 from $48.54, to reflect higher “total cost of acquisition,” or TAC, and the exclusion of about $1.10 in profit lost from selling the set-top business.
Jason Helfstein, Oppenheimer & Co.: Reiterates a “Perform” rating and a $765 price target. “While GOOG reported better than expected non-GAAP, the upside was driven by lower taxes and higher interest income. Meanwhile, the company admitted Nexus supply was constrained, resulting in lower than expected device sales and higher core margins. However, we see the margin overhang remaining a factor in 2013, assuming stronger device sales.” Helfstein cut his 2013 revenue estimate to $46.9 billion from a prior $52.1 billion, while keeping his core search business estimate unchanged, leading to EPS of $46.02, up from $44.43 previously.
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