Class A shares of Google edged upward in early trading this morning after the company received a big upgrade from analysts at Goldman Sachs. The search giant’s stock rose as much as 4.89% to $642.43 per share following this morning’s report.
Margin improvements expected
In their report dated Aug. 26, analyst Heather Bellini and her team said they think Google is just beginning a multi-year cycle aimed at expanding margins. Greater margins will of course result in earnings outperformance, which should trigger a multiple expansion, the Goldman team thinks.
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They expect to see signs of execution on the margin improvements on the company’s fourth quarter earnings call. They will also be listening for more details on Chief Financial Officer Ruth Porat’s 2016 initiatives and looking for new financial disclosures.
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Porat has been focusing on cutting costs, and one sign of her influence over the company she just joined not too long ago was the surprise announcement that Google is forming a new parent company called Alphabet Holdings for the purpose of improving its financial reporting structure. Analysts widely expect greater transparency into the search giant’s many businesses, although just how much transparency there will be will remain up in the air until we see the first earnings report done in that new structure.
The Goldman Sachs team agrees with pretty much every other firm on Wall Street in that improvements in transparency should be a key driver for Google’s stock.
Google price target to $800
They also report that there are signs that the search giant’s momentum is picking back up again. Their field checks with marketing executives suggest that Google is successfully speeding up mobile search and YouTube monetization. When combining these signs of execution with management’s new focus on monitoring and cutting costs, they became more positive on the company’s stock.
As a result of all these developments, Bellini and team upgraded Google to Buy and added it to their Americas Conviction List. They also significantly raised their price target on the search giant’s shares, pushing it from $660 up to $800 per share with their higher estimates.
The Goldman Sachs team also points out that even though Google shares climbed 5% after the company’s second quarter earnings report, the non-GAAP price to earnings ratio (before today’s share price increase) was just 4.9 “turns higher” than the multiple of the S&P 500 and at a 30% premium to the S&P. That’s in line with the average premium over the last five years, but they expect Google’s earnings growth to be four times faster than expected this year and two times faster next year.