Kaufman Initiates Google with Buy, $680 Price Target
Google's ramp over the past few weeks has been a thing of beauty; everything is going their way, including distractions at the main competitors that should benefit them in the year ahead.
Their impotent competitors cannot seem to provde much of a threat and cannot challenge them, although you might want to question the timing of this call from KBRO:
* Initiating Coverage with a BUY Rating. We are initiating coverage of GOOG with a BUY rating and $680 price target, based on 27.5x our 2009 EPS estimate, in line with other leading tech growth companies.
* Local Market Is Underappreciated. We believe the local opportunity is underappreciated and GOOG has only begun to scratch the surface of value it can provide to the local market. Currently, the local advertising market in the U.S. is estimated to be a $95 billion opportunity. The vast majority of this spend is offline; however, as media consumption patterns continue to migrate to online channels and businesses understand where customers are engaged, we expect local budgets to follow users to the Internet. In addition, we believe many of the offline companies (Yellow Pages, Newspapers, Direct Mail) will have significant problems covering debt-laden balance sheets. This could accelerate the transition of advertisers to the web. Along with its web search initiatives around the local advertising opportunity, we believe the company's mobile search, maps, 411 and SMS will all be monetizable opportunities focused on the local market.
* International - Relatively Nascent Opportunity. The International search business last quarter became more than 50% of GOOG’s total revenue for the first time. We believe there is plenty of room to maintain a high rate of growth in International markets. Internet penetration rates are, with a few exceptions, much lower in the rest of the world with global penetration rates only around 20%. We expect penetration rates could double over the next 10 years, providing GOOG the opportunity to expand its consumer reach and grow its advertising revenue significantly.
* Foray into Brand Advertising. We believe GOOG has large aspirations for all advertising, not just search or web advertising. With that said, the web will be the test ground to further the development and efficiencies of offline advertising and better quantify offline returns. The two primary areas GOOG will invest in, in our opinion, is its YouTube and DoubleClick business units. With YouTube, GOOG will have a new form of advertising and will be able to refine measurement techniques most similar to television advertising. DoubleClick will become the de facto brand ad serving tool and measurement application for all media - not just Internet - as the company integrates this with other ad serving technologies, such as Audio Ads.
* Risks. The margin structure, in our opinion, is the most significant risk to GOOG shares in the near term. In 4Q07, 94% of the company’s net revenue came from Google-owned web sites or licensing revenues. The company was able to generate operating profit margins (excl. stock comp) of around 50%. However, margins have come down over the previous few years, as the company has increased both operating and capital spending. GOOG competes with some of the largest technology and media companies in the world including Yahoo!, Time Warner and Microsoft most directly, for search market share. Finally, the company has seen its net revenue growth rates slow from 65.8% in 1Q07 to 45.7% in 1Q08; this slowdown could continue faster than we anticipate, which could lead to the company missing our estimate, a lower multiple or both.
Yes, they might be a few points and days late with this call. Eveyone seems to love Google’s stock again, which is one reason to consider scaling out into strength if it blows throw $600 and assaults its 52-week highs.
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The content contained in this blog represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position
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