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Morgan Stanley analyst Scott Devitt this morning cut his rating on Google to Equal Weight from Overweight, reducing his price target on the stock to $600, from $645. He also trimmed his profit forecasts for the company: for 2011, he now expects $31.44 a share, down from $32.73; for 2012, his new forecast is $34.43, down from $36.07. And for 2013, he now projects $37.58, down from $38.44.
“Google is spending to innovate in social/local, retain talent, and to drive user adoption of key products, but those investments have uncertain ROI/payback periods,” he asserts in a research note.
Devitt sees several questions for the stock and the company. And he offers some answers bulls may not like:
- Will margins decline from here? Yes, he says. “Given Google’s aggressive hiring plans, rising compensation expense, and significant advertising spend on Chrome and other Google products, we expect EBITDA margin to decline in 2011 and 2012.
- Will “newer” businesses drive near-term revenue outperformance? No, says Devitt. “We believe the consensus is too optimistic on the net revenue contribution of newer businesses, such as DoubleClick, YouTube, AdMob, Android Market and mobile search,” he writes. “In 2011, we expect search and contextual ads to contribute ~90% of Google’s net revenue.”
- Will investments in local eCommerce and/or social pay-off? Too early to tell, he says.”We are encouraged by early progress of Google Plus and Google Offers, but Google faces stiff competition from incumbents who have first mover advantage. The pay-offs of such endeavors may be longer-term.”
source: forbes.com
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