Bank of America Corporation (NYSE:BAC)’s investment and brokerage unit Merrill Lynch has downgraded Google Inc (NASDAQ:GOOG) from Buy to Neutral. Google’s Q3 earnings were leaked yesterday a few hours before the scheduled release time (aftermarket), forcing the company to halt its stock activity at the Nasdaq stock exchange. The search engine giant missed analysts estimates of $10.63 earnings per share, forcing the company’s stock to plunge below the $700 per share mark, closing the day at $695.


Following the release of the sloppy Q3 results, Merrill Lynch has reduced it price target for the stock from the previous $790 to $745 per share, and for the first time since 2006, downgraded it from Buy to Neutral. The company’s per click revenue decelerated to a 5% growth rate.

The analysts have dissected Google Inc (NASDAQ:GOOG) investor sentiment to two camps:

The first camp is composed of those with a longer term view and believe the company is well positioned to build a strong mobile ecosystem, thereby becoming (Apple rival?), and driving more Google usage.

The second camp is for those that think the mobile advertising transition could create more ad revenue and margin disruption than the street anticipates.

Merrill Lynch analysts said, “we are moving to the cautious camp and downgrading Google to Neutral from Buy (we have been a Buy since 2006), as we think the mobile transition is accelerating, and more difficult quarters are likely in 2013”.

Another reason likely to have contributed to this downgrade is that, Google Inc (NASDAQ:GOOG)’s stand-alone revenues missed analyst estimates at $8.75 billion as compared to ~$8.98 billion expected, while the EPS of $9.03 was $1.62 lower, than the street estimate.

The analysts expect Google Inc (NASDAQ:GOOG) to register $40.19 EPS for the current calendar year, up from $36.06 per share from last year, representing 11.45% growth rate. The Internet-based tech giant is expected to maintain a record growth rate of 14% for 2013, with this rate falling to 13% in 2014. Regardless of that, the analysts believe that there will be no dividends paid for the next two years.

However, Merrill Lynch’s estimated EPS for Google Inc (NASDAQ:GOOG) falls short of the consensus figures from Bloomberg, of $42.68 per share in the current year, $49.88 in 2013, and $57.67 in 2014. GAAP EPS is estimated at $32.77 per share in 2012, $38.27 in 2013, and 43.43 in 2014.

The company’s price to earnings ratio is expected to improve sequentially from 17.3x in 2012, to 13.4x in 2014, while free cash flow is expected to be 5.75 of sales in 2012, with the figure increasing by ~1.00 percentage point sequentially through 2014.

At the time of this writing, Google Inc (NASDAQ:GOOG)’s stock was back to a popular region, as it was trading at $700.09 per share, up $5.09, or 0.73% increase from yesterday’s close.