Google is getting mixed reviews from analysts these days. The search giant faces increasing competition in the digital advertising space and speculations about whether it’s ever going to stop hoarding cash. Now Google has earned a downgrade from analysts at Stifel based on a change in multiple.
Evercore ISI analysts cut their price target for the company, although they remain very positive on Google.
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Google downgraded to Hold
In a report dated Jan. 8, 2015, Stifel analysts Scott Devitt, John Egbert and Alex Chavdaroff said Google’s multiple has been in constant flux over the years. First the search giant’s multiple contracted, then it expanded, and now they believe it has contracted again. As a result, they downgraded Google stock from Buy to Hold and eliminated their previous target price of $610 per share.
The Stifel team said their downgrade doesn’t mean they think Google shares will slip a lot this year. They say valuation supports Google stock, especially when looking beyond the internet sector. The reason they downgraded Google shares is because they just don’t see anything that could drive upside for them in the near term. They also think “the best days” for Google stock are probably now in the past.
Google’s lower margin businesses grow
The analysts point out that Google’s core business is maturing, so there’s little room left for growth there. They add that although the company is growing outside its core ad business, the growth is coming in areas with lower margins like Google Play and YouTube. They see the greatest opportunity as being in e-commerce but point out that Google faces increasing competition from direct navigation as shoppers go directly to Amazon and other e-commerce sites rather than using search.
Google also faces more competition in its core advertising business from Facebook and other companies looking to take pieces of the pie as offline advertising budgets move online. The Stifel team expects Facebook to have taken 28% of the incremental global digital ad share in 2014, compared to 22% the previous year and Google’s projected 55%. They say the social network will also be going up against Google’s off-platform efforts more directly if its Atlas and Facebook Audience Network end up being effective.
Evercore ups Google’s price target
While Google earned a downgrade from Stifel analysts, the search giant received a price target decrease from analysts at Evercore ISI. In their report dated Jan. 8, 2015, analysts Ken Sena, Conor McDade and Andrew McNellis bumped their price target down from $725 to $675 per share. However, they remain Buy-rated on Google.
Unlike Stifel analysts’ focus on the maturation of Google’s core advertising business, they looked more at the changes the search giant is making. For example, users now see reservations, booking confirmations, tracked packages and photos in more places, including their logged-in Search, Maps and Google Now experiences. The Evercore team sees these as a positive not only for Google’s core search business but also for its display business.
They point out that Google is seeing lower prices per click as it moves search buyers to “more granular” campaigns. The result is lower margins even though Google is personalizing search results more than before. The Evercore analysts lowered their estimates, which is why they cut their price target for Google shares. The lowered their fourth quarter EBITDA estimate 3% to $7.36 billion. For 2015, their EBITDA margin estimate falls 250 basis points to 49.3%.
What about Google’s contract with Apple?
Recently it was revealed that Google could lose its agreement with Apple as the default for Apple’s Safari browser. The contract is up for renewal soon, and the Evercore team agrees that there is a risk of Google losing it. However, they think it’s easily manageable in terms of profit and loss. Indeed, they’re probably right about this because the contract likely represents just pocket change for a company as big as Google.
They still think Wall Street is underappreciating Google’s scale and data efficiency, so Google remains one of their top picks. They think the recent weakness in Google shares offers a buying opportunity for investors.
Class A shares of Google fell by as much as 1.5% during regular trading hours today.