Everybody Hates Google

Remember when analysts perpetually raised Google's (Nasdaq: GOOG  ) share price and income targets? That is so 2007.

RBC Capital Markets became the latest firm to rain on Google's parade, with analyst Ross Sandler slashing the search-engine giant's stock price target from $675 to $530 this morning. He feels that while the company will continue to gain market share in the lucrative search-engine market, Google's online growth will nonetheless slow this year.

"We do not see meaningful positive catalysts playing out near-term," Sandler suggests.

He's not alone. I used to marvel at how Google would blow past Wall Street's estimates, leading to an analyst stampede of higher estimates. Google has come up short in two of the last three quarters, a far cry from obliterating analyst projections in 10 of its first 11 quarters as a public company.

As you can imagine, few things are as vengeful as an analyst scorned. Wall Street's finest have subsequently hosed down their expectations.

2008

2009

Today

$19.98

$24.91

Last Month

$20.15

$25.14

2 Months Ago

$20.78

$26.28

Source: Yahoo! Finance.

Google sneezes, everyone catches cold
It's not just Google. Over the past three months, Yahoo!'s (Nasdaq: YHOO  ) bottom-line targets have gone from $0.54 a share this year and $0.70 a share next year to $0.46 and $0.55, respectively. The difference here: As long as there is the hope of Microsoft (Nasdaq: MSFT  ) sticking around long enough to buy Yahoo!, that protective cocoon should keep Yahoo! shares from plunging in the mid-teens.

Google doesn't have the luxury of a sugar daddy in waiting. It's bearing the full brunt of fears that an economic slowdown will dry up online advertising budgets.

That's a silly notion, frankly. Paid-search advertising is the last thing that sponsors will retreat from. Because they typically only pay for generated clicks that result in leads, paid search is fully accountable. Different dynamics may force the actual bids higher or lower, but as long as they want business, it's the most transparent lead generator out there.

I'm not trying to excuse Google. It's earned most of the lumps that its shareholders have endured in recent months. The company isn't acting like it cares about missing profit targets or deflating once-lofty expectations. It's gone on spending sprees, initiating hiring waves and costly endeavors that don't translate into the near-term profit gains on which an impatient market banks.

Google may feel that it has its own protective cocoon. Since it doesn't normally issue guidance, it can argue that it should not be held accountable for third-party guesstimates. That's true to a certain extent, but if so, options-padded executives can't bellyache about falling share prices, since they're usually dictated by the expectations of the third-party market.

The upside of downgrades
Keep in mind that the new price target isn't necessarily a bearish one. If Google does hit that $530 mark a year from now, Google shares will have climbed a respectable 23%. That may not appease investors who were spoiled by seeing the stock double every few months after its IPO at $85, but it's more realistic, given Google's slowing growth.

The near-term catalysts are hard to come by. The company is no slouch in overseas markets, where it can benefit from a weak dollar and possibly sidestep domestic recessionary pressures, but it's not exactly growing market share there, either. Japan and China, for example, already have entrenched leaders in Yahoo! Japan and Baidu.com (Nasdaq: BIDU  ) . 

The $3.1 billion DoubleClick deal will beef up the company's display advertising business, but don't be surprised if the prospects find you yawning, given the lethargic growth at online display-advertising heavies like Yahoo! and Time Warner's (NYSE: TWX  ) AOL.

By making its mark in paid search first, Google left itself no choice but to expand into less lucrative interactive marketing areas.

This doesn't mean that one should bail on Google now. I sure wouldn't, since it's trading at just 17 times next year's earnings. Then again, that also isn't Google's profit target. Investors shouldn't be surprised to see estimates continue to trickle lower, should the company continue its recent string of bottom-line disappointments.

If you can get past that possible burn, then it's wrong to hate Google. There may be no near-term positive catalysts awaiting, but there's a similar shortage of negative catalysts, too. There is no Google-killer looming in the distance, nor much reason to believe that Google will be challenged for its online-advertising throne for several years at least.

You can't dis Big G for that. It's wrong to hate royalty simply because recent shareholders have gotten royally burned.


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