New York-based Benchmark Company and Germany's Independent Research each cut Google to "hold" from "buy," with a price target of $700. These are the first downgrades of Google since early December, when Hamburger Sparkasse analyst Marco Guenther reduced his recommendation on Google to "hold."
Both downgrades come a day after Piper Jaffray analyst Gene Munster wondered aloud if Google's Chrome Web browser was a $1 billion asset for the company. Munster has an "overweight" rating on Google with a $720 price target.
Benchmark analyst Clayton Moran's research note is getting the most attention Thursday. Moran heaps a lot of praise on Google, calling the company a "high-quality industry leader" and notes that Google has virtually no long-term debt, about $101 per share in net cash and probably generated about $34 per cash in 2011 free cash flow. Moran even keeps his price target of $700, which is about 4.7% above the stock's current price of $668.28.
However, Moran still decided to downgrade Google to "hold" from "buy," citing a material slowing in Europe and potentially in the U.S. In particular, Moran has earnings estimates below consensus targets for fear that the first half of 2012 will be disappointing for Google.
Moran says his channel checks indicate that European online advertising has dropped from 20% year-over-year growth in the first half of 2011 to only 5% in the fourth quarter. Europe, it turns out, accounts for about 35% to 40% of Google's revenue. Google dominates the Internet search market in Europe with a 90% market share.
"This dominant position limits the potential for share gains to offset macro headwinds," Moran writes. "The European weakness could be spreading to America. This is an initial view which could change, but there is clearly hesitation as we start 2012."
Moran's evidence of the contagion spreading to the U.S.: His checks show that advertisers are taking a wait-and-see approach to start 2012 due to high uncertainty and economic concerns. Moran's other concern is a slowed momentum in Google's video streaming site, YouTube, as the company struggles to find the correct video monetization. "Greater online video competition including more professional content may be contributing to a slight slowing," he adds.
It's not all bad, though. Moran says one area of sustained strength for Google is in the real-time bidding for its Ad Exchange. "Volumes are growing tremendously," Moran writes. "But this targeted and measurable display format could be cannibalizing search, at the margin."
As a result, Moran cut his 2012 revenue growth forecast to 19%, below the consensus estimate for Google to grow revenue 23% this year. Moran also lowered his full-year earnings-per-share target to $42.95, a full dollar below the average analyst estimate.
The main takeaway for investors is perhaps that no company is immune to the European crisis, not even the biggest Internet company on the planet. Shares, though, are only down 0.3% in Thursday's premarket session. But Benchmark's and Independent Research's reports today highlight just how broken the buy/sell/hold rating and price target system is.
For example, while both Benchmark and Independent Research have a "hold" rating and $700 price target, Credit Suisse has an "outperform" rating on Google with the same $700 price target. Meanwhile, Citigroup analyst Mark Mahaney, who was lauded in today's Wall Street Journal, recommends Google as a "buy" with a price target of only $680.
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