Although analysts at Pivotal Research have been negative on both Google Inc and Twitter Inc for some time, they’ve apparently had a change of heart. They have upgraded the stocks of both technology companies from Hold to Buy.
In a report dated Dec. 17, 2014, analyst Brian Wieser noted that he’s remained “generally negative” on Google since early last year. His main concerns have been margin erosion, continued capital investments and expensive diversification away from the company’s core search and advertising business.
Wieser said he upgraded Google because its business expansion has ended up going better than he thought it would. He also said the margin erosion wasn’t as bad as he had expected, although it was clearly worse than what the rest of Wall Street was expecting.
One newer negative he noted was the hit Google’s relationship with some of the world’s governments has taken. The analyst thinks the search giant could see higher costs in some of those countries because it might have to pay higher taxes, provide support for “governmental pet projects” or pay fines. However, he doesn’t see anything “resembling a meaningful threat” here.
He expects the current trends to continue as Google’s high margin paid search ad business decelerates and the company’s mid-margin and low margin display ad business and non-add businesses keep expanding. Meanwhile he expects the company to continue spending a lot on capital expenditures.
The analyst said Google would probably be more capital efficient if it returned capital to shareholder and focused more on advertising while leaving the other endeavors to management’s “private investment choices.” However, he said none of these thinks are likely to happen and that at the current share price, they don’t really matter much.
He thinks the continuing erosion of the margins and high capital expenses are already priced in. Along with his upgrade to Buy, he set a price target of $610 per share on Google. The company’s Class A shares edged upward less than 1% during regular trading hours today.
Wieser has been negative on Twitter Inc since its initial public offering because of the valuation. He said investors gave it a high value because of its “venture-like characteristics.” He still believes Twitter’s core product is only a niche product when it matures.
He thinks the recent weakness in Twitter shares has been overdone, but he understands the big investor concerns. For example, there’s been quite a bit of insider selling of Twitter shares. Also management has been highly optimistic on their new products, but turnover at the executive level has been high recently. The analyst thinks the management turnover is because Twitter is “still trying to become something bigger than it presently is.”
As a result, management must push hard in order to meet the expectations of the higher-ups. Wieser said even if top management has unrealistic expectations, so much turnover isn’t really a bad thing because of many different kinds of approaches Twitter could consider as it attempts to achieve its goals.
He believes the ongoing revenue growth ought to put to rest the ongoing concerns around user trends because Twitter continues to enjoy strong relationships with advertisers. As a result, he is focusing on Twitter’s scale around the time when revenue growth starts to plateau.
He still expects Twitter to hit $6.6 billion in revenue by the end of 2019. Along with his upgrade to Buy, he set a price target of $42 per share on the company’s stock. Shares of Twitter Inc jumped more than 3% during regular trading hours today.