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Parsing the Street's Reaction to Google


Bulls and bears weigh in on the search giant.

Google (GOOG) shares slid by more than 3% to $563.94 this morning after its earnings release yesterday. Reactions are mixed as to where the company's stock is headed.

Will Google pull out of China? Will Google's Nexus One mobile phone adapt to combat the negative press it's been hit with since its recent launch? And what about the news that Apple (AAPL) is considering replacing Google as the default search engine on the iPhone with Microsoft's (MSFT) Bing?

According to BusinessWeek, an Apple shift to Bing would "cut Google off from some of the search data that's the lifeblood of its business. Google has grabbed 65% of the traditional PC-based search market in large part because it has had far more information about what people are looking for and could use that to refine its search algorithms. If it can't get the same kind of data as people shift their computing to the iPhone and other mobile devices, Google risks losing its edge in search."

"This would be a significant blow," said analyst Jonathan Yarmis of the research firm Ovum. "Google would be cut off from the most important platform on the mobile Web."

We all know the markets hate uncertainty. But Standard & Poor's equity analyst Scott Kessler told the Wall Street Journal that Google, specifically, "is a stock that tends to not fare as well when there is material uncertainty that is not fully addressed."

Here's what the word on the Street is:

  • Collins Stewart downgraded Google to Hold and lowered its price target to $615 from $635. Beyond 6% to 10% upside, the firm says Google is "increasingly becoming a show-me story" and Google will need to prove its ability to improve upon its non-core search business.

  • Jefferies believes Google's revenues will be affected by only 1% to 2% in 2010, due to the China issue. However, not being part of that huge and fast-growing market will be a long-term strategic loss.

  • Citigroup estimates Google's 2010 revenue from its Chinese business could be around $300 million to $350 million, or 1.5% of total expected 2010 revenue. But Citi doesn't see any noticeable impact on the company's bottom line, as they expect Google to post $27.12 non-GAAP EPS in 2010.

  • UBS has an interesting take on how Google's troubles may lift Baidu (BIDU) shares. Even if Google doesn't pull out of China, UBS thinks advertisers will have concerns about spending with and sees this as a victory for Baidu -- it upgraded the stock to Buy from Neutral and raised its price target to $523 from $380.

  • Credit Suisse seems to be firmly in the middle ground. The firm noted concern about Google's possible exit from China, saying that it remains an overhang. Still, the firm reiterated an Outperform rating and a $700 target.

    Some are fully bullish on Google, regardless of the current hiccups it's experiencing.

  • Houston money manager Ryan Krueger, who currently doesn't have a position in Google, likes the stock at current levels:

    "They score very well on our system. I mean, look, my 7-year-old saves her work at public school via Google Docs. If I buy, it's not a technical trade or scalp. I just don't buy them down big, because, as you've seen, declines lead to declines, not bottoms. Bottoms are best bought with a stop above, so I'd rather do that."

    Krueger also believes the just-announced Supreme Court ruling allowing corporations to spend directly on political campaigns will positively affect Google's stock.

    "Increased ad spending will surprise to the upside and bang for your buck will be ever more important," he said.

  • Last week, Minyanville professor Sean Udall added shares of Google back under $595 and said, "I likely won't let this China issue knock me out of them. However, the breach of the 50-day may hold me back from purchasing shares right away, so I can gauge the reaction and see how much cheaper I can acquire shares. Don't get me wrong, I'm an aggressive buyer on weakness but sometimes you have to sit back and see what the market gives you."

    Today on Minyanville's Buzz and Banter he wrote, "I think the lows are in for Google and this selloff will prove an excellent entry as Google will soon be back into $600s in relatively short order. In fact, I'm raising my low- to mid-$700s target to the low $800s as I feel Google may be the cheapest large/mega-cap growth stock on the planet. I covered all my hedges and have no downside protection at this point. Bottom line, I've followed every one of Google's quarters and I've seen quarters this good propel the stock $25 to $40 higher."

  • Stifel Nicolaus analyst George Askew reiterated a Buy rating on Google today, noting that Google's 2009 fourth-quarter results were strong despite "the market's initial knee-jerk reaction"

  • Barclays is maintaining an Overweight rating and a $675 price target.

It should be an interesting 2010 for Google and investors as we watch how the company's foray into hardware pans out, the financial ramifications of Chinese government policy, and the intensifying rivalry with Apple.

What does it all mean? It may simply be one man's opinion, but, to borrow a line from Collins Stewart, Google looks like this year's "show-me story".

No positions in stocks mentioned.
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