zacks investment research - google - nov 1, 2011

8/3/2019 Zacks Investment Research - GOOGLE - Nov 1, 2011

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2009 Zacks Investment Research, All Rights reserved. www.Zacks.com 111 North Canal Street, Chicago IL 60606

Google Inc-Cl A (GOOG-NASDAQ)

SUMMARY

SUMMARY DATA

Risk Level * Below Avg

Type of Stock Large-Blen

Industry Internet-Servc

Zacks Industry Rank * 27 out of 26

Current Recommendation NEUTRALPrior Recommendation Outperform

Date of Last Change 02/22/2011

Current Price (10/31/11) $592.64

Target Price $622.00

Google is one of leading providers of target-basadvertisements on the web. Google s third-quarter resthrashed the Zacks Consensus Estimate, on the back of sorevenue across most geographies and particular strengthmobile. Despite the initiatives to drive growth, Google shahave been range-bound, due to legal pressures, China amore recently, the management reorganization. However, believe that the company has shown superb executiondate, more or less maintaining share in a fast-growmarket. We are also positive about its progress in displwhich is set to generate more ad revenue than search 2015. Google s search market share, focus on innovati

strategic acquisitions and proactive approach to mobshould continue to generate strong cash flows. We therefreiterate our Neutral recommendation on the shares.

52-Week High $639.63

52-Week Low $474.88

One-Year Return (%) -3.43

Beta 1.14

Average Daily Volume (sh) 3,731,249

Shares Outstanding (mil) 323

Market Capitalization ($mil) $191,356

Short Interest Ratio (days) 1.95

Institutional Ownership (%) 63

Insider Ownership (%) 21

Annual Cash Dividend $0.00

Dividend Yield (%) 0.0

5-Yr. Historical Growth Rates

Sales (%) 23.6

Earnings Per Share (%) 25.8

Dividend (%) N/A

P/E using TTM EPS 19.2

P/E using 2011 Estimate 18.4

P/E using 2012 Estimate 15.4

Zacks Rank*: Short Term1 3 months outlook 2 - Buy

* Definition / Disclosure on last page

ZACKS CONSENSUS ESTIMATES

Revenue Estimates(In millions of $)

Q1 Q2 Q3 Q4 Year

(Mar) (Jun) (Sep) (Dec) (Dec)

2009 5,509 A 5,523 A 5,945 A 6,674 A 23,651 A

2010 6,775 A 6,820 A 7,286 A 8,440 A 29,321 A

2011 8,575 A 9,026 A 9,720 A 8,378 E 35,699 E

2012 8,289 E 8,526 E 9,021 E 10,209 E 36,045 E

Earnings Per Share Estimates(EPS is operating earnings before non-recurring items, but including employe

stock options expenses)

Q1 Q2 Q3 Q4 Year

(Mar) (Jun) (Sep) (Dec) (Dec)2009 $4.49 A $4.66 A $5.13 A $6.13 A $20.41 A2010 $6.06 A $5.71 A $6.72 A $7.81 A $26.31 A2011 $7.04 A $7.68 A $8.33 A $9.24 E $32.29 E2012 $8.79 E $8.97 E $9.50 E $11.23 E $38.49 E

Projected EPS Growth - Next 5 Years % 22

November 1, 2011
http://www.zacks.com/


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Equity Research GOOG | Page 2

OVERVIEW

Mountain View, California-based Google, Inc. was founded in 1998 by Larry Page and Sergey Brin. Thcompany is in the business of providing target-based advertisements on the web.

Products and services involve the provision of web-based information through own and hosted (networkwebsites, with the help of software and Internet tools on both computing and mobile platformsAdvertisements are served alongside, using Google s AdWords, AdSense, DoubleClick and YouTubtools, with the company s page ranking and text-matching technology and infrastructure facilitating thprocess.

In 2010, Google generated 66% of revenue from owned websites, 30% from network websites and thbalance from licensing and fees. Approximately 48% of revenue was generated in the U.S., 11% camfrom the U.K. and the balance from Other regions.

Revenue by Geography in 2010

48%

11%

41%

U.S. U.K. Other

Search, including general, personalized and advanced search is the primary revenue earner. Speciafeatures offered in this line include web page translation; facilitating tools such as spell checkecalculator, dictionary, and currency and measurement converters; vehicles search, etc. by identificationumber; search of cached links that are no longer available on the web; as well as movies, news, bookspictures, images and finance.

The second product line is Applications, more commonly referred to as apps. Google apps have beedeveloped with the intention of providing users with tools that would enable them to create, share ancommunicate information collected or generated by them. Some of the important products in thcategory include Google Docs, Google Calendar, Gmail, Google Groups, Google Reader, orkut, BloggeGoogle sites and YouTube.

The Client line includes facilitating programs such as the Google toolbar (search box along with thInternet Explorer and Firefox browsers), Google Chrome (open-source browser), Google Pack (fresoftware from Google and other developers), Picasa (photo-sharing) and Google Desktop (full-texsearch of the user s own PC).

Google GEO includes Google Earth, Google Maps, and Google Sketchup and Sketchup Pro, which helpeople locate places all over the world, obtain directions to any destination and even draw their owmaps.

Revenue by Source in 2010

66%

30%

4%

Google sites Network websites Licensing and Other


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One of the most important product lines that should pick up strongly over the next few years is GooglMobile and Android. Google Mobile includes mobile versions of a host of services provided by Googland also allows users to access pages on the entire Google index. The Linux-based Android operatinsystem was initially created by Google, but later developed by the Open Handset Alliance. Android cabe used by developers to write programs in the Java language that can be managed virtually. T hcompany has since announced a tablet-optimized version of its popular OS, which it calls HoneycombFirst devices based on the system will ship this year.

Other services include Google Checkout (a payment platform for faster online shopping) and GooglLabs (a place where prototypes are posted and engineering opinion is sought). Google has now addethe digital wallet, which is however the subject matter of much controversy.

Total revenue in 2010 was $29.32 billion, an increase of 24.0% from 2009 levels and having grown at CAGR of 22.6% over the past five years. The company employs a large number of sales staff in its 8offices across more than 40 countries worldwide and supplements the sales force with online channelsThe most significant competitors are Microsoft Corporation and Yahoo! Inc.

REASONS TO BUY

Google focuses on innovation, launching products and services that create win-win situations, sthat both users and advertisers can benefit. The success of this strategy is the underlying reason fothe company s phenomenal growth since inception. Because Google generates significant cash fromoperations and also holds a huge cash balance, management has the flexibility to pursue growth iany area that exhibits true potential. We believe that the company has the financial muscle tovercome any short-term adverse conditions to generate significant growth in both revenue anprofits over the long term.

The company s history of execution is unparalleled. Over the past five years, revenue has grow

at a CAGR of 22.6%, gross profit dollars at a CAGR of 24.3% and operating profit dollars at a CAGof 23.9%. The strong double-digit growth is indicative of management execution. Apart from the corsearch business, which continues to grow strongly, the company has successfully integrated sommajor acquisitions (AdMob, DoubleClick and YouTube to name a few), which provided it with thkind of technology required for sustained growth in a highly dynamic and competitive market. Whilthe existence of operating leverage is evident from the past few years results, 2011 will be a year ohigher costs, necessary for continued growth.

Google s search engine is advanced, simple and adaptable, all at once. This is the main reason foits leading search market share. According to ComScore, the company had a 65.3% share of thU.S. explicit search market in September 2011. Although this was down 0.8% from September o2010, it was up 0.5% on a sequential basis, entirely at Yahoo s expense. Both Microsoft and Yaho

are much smaller players seeing monetization issues that could continue over the next few quartersalthough Microsoft appears to be making some headway. In the Asia/Pacific region also, Google hathe leading market share in Thailand, India, Malaysia, Singapore, Australia and New Zealan(iProspect survey 2010). It also has substantial market share (although not the highest) in JapanTaiwan, China and Hong Kong. While local search engines dominate the South Korean markeGoogle has eked out a 9% share in the region. Additionally, Google is also the dominant searcengine in Europe, with leading market shares of over 90% in the U.K., France, Germany and SpainDespite the company s U.K. market share slipping a bit last year, Google remains by far the searc


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engine of choice. The second favorite is still Yahoo, although Yahoo s market share has been rangbound for quite some time now. Microsoft s Bing appears to be gaining some share, although thsearch engine is still way behind Google.

Although the desktop was the most-used search platform in the past, mobile is fast catching upWith PC-makers scrambling to gain a foothold, a plethora of mobile Internet devices are making theway to the market. Ultra-thin and ultra-light are the buzz words in the space today, creating a markefor the new-age, social networking-centric tablets. At the same time, growth rates in mobile searchave really escalated since cell phones started getting connected. This essentially means thacustomers are increasingly getting connected on mobile devices, rather than on PCs where Googreigns. Google is leveraging off its Android OS to fill in this gap. The company s intention is to rapidincrease the number of Android-based devices in the market in order to reduce its dependence omobile partners, such as Apple that are fast developing into competitors. Additionally, it has beeobserved that users of Android-based phones stay connected longer and use search services morthan users of other phones. Therefore, management strategy appears to be on target. Googsearch is already the most popular, so all the company needs to do is ensure that buyers have thoption of using Google. Android is seeing phenomenal success, with Android-based phones sellinvery well and Android based MIDs seeing rapid adoption. Honeycomb for tablets should also dextremely well. Moreover, the quality of mobile displays continues to improve, which will make thads even more effective. Google s acquisition of AdMob, which has the technology to create, servand analyze mobile advertisement formats is contributing to the company s growth in the mobisegment. In addition, Admob brings with it a mobile ad exchange through its AdWhirl acquisition.

Google s diversification strategy and its strength in the mobile market took a new turn with thannouncement of the digital wallet, which is a point-of-sale ( POS ) solution enabling an Androphone user to wave the phone near a POS terminal to make a purchase. The technology that makethis possible is called Near Field Communication ( NFC ). Google s strategy behind Android waoriginally to maintain its position in search, which was increasingly moving from the desktop to thnotebook and then to mobile phones. However, the past year or so has seen a huge change iconsumption patterns, with a corresponding increase in demand for location-based services. I2009, a number of Internet research companies coined the word m-commerce, pointing out thaconsumers were already purchasing fast-food and other low-range products through their mobil

phones. This greatly increased the window of opportunity for Google, which already hasophisticated machinery in place to predict consumer behavior and provide relevant informatioregarding nearby eateries, points of interest and the like. If Google was able to add a paymenoption, this would make the Android phone an all- in-one device, from which a person could locatthe place he wanted, order the item/go there and even complete the transaction. This would al seliminate an earlier problem Google had with respect to conversion of mobile search ads. Sincmobile users have the choice of going to the place, they could make direct cash or credit cardpurchases that did not link the transaction to the ad. But using this system, it will become easier tfollow the entire transaction, which would have a positive impact on Google s revenue. The producis not expected to take off right away, since it will be dependent on merchant adoption and legaissues raised by Paypal and eBay. However, it greatly increases the attractiveness of the Androiphone, so pickup should be quick.

Management continues to invest in display technologies, which has helped Google attain a stronposition in the market. While eMarketer places Google in the third position, behind Facebook anYahoo, IDC estimates that Google has already overtaken the other two to take the number onposition. Irrespective of the exact position, It is clear that Google has emerged as one of thstrongest players in the display ad format. The company has so far focused on the SMB segmenwhich has gained from its Google Display Network (GDN). We expect the success of its GDN tattract bigger players now, which should help it take market share from Yahoo. We think Google ha


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executed superbly, since it has gradually built its expertise in the display market, which is on track tgrow into a bigger market than search by 2015 (eMarketer). We also believe that the increasing abudgets and focus on branding in 2011 will work in its favor. Additionally, Google may be expecteto continue investments to improve the quality of its network. This is likely the reason for its recenacquisition of Admeld (a real time bidding platform), for around $400 million. Publishers have aspace that advertisers require and the management of this space maximizes revenue for publishersAdmeld s network includes a number of publishers and advertisers that are instantly connected oits own server, as well as several other networks such that the space is automatically allotted to thadvertiser willing to pay the highest price for it at that point of time.

Another area that continues to grow very strongly is video. Google serves video ads over thYouTube platform, where viewership continues to increase rapidly. Management has stated thausage and traffic remain very strong and we expect continued growth in the area going forwardVideo ads on Google.com are currently limited to entertainment, movies and producdemonstrations. The company intends to expand the scope of video ads on Google.com to includother areas as well. With 50% percent of new recruitments in engineering and another chunk isales, management clearly intends to build upon its success in video, mobile, display and search.

Google has been making a large number of acquisitions. The past year has seen the compansnapping up many smaller players. The targets are typically much smaller than Google, with speciftechnologies that could enhance the search experience and/or augment its platform convergencplans. The largest acquisition in recent times was that of AdMob, a strategic investment foadvancing the company s mobile plans. Another important acquisition was that of ITA Softwarewhich Google managed despite protests from a number of industry players. Google followed this uwith Motorola Mobility, bringing a large number of patents that should help Android.

REASONS TO SELL

Google remains the leader in search. However, recent statistics show that the company s searcmarket share is see-sawing, mostly due to increased competition from Microsoft s Bing. Thsearch market going mobile and Microsoft s push in the segment (through its decision to go witARM architecture and the Nokia phone deal) are increasing competition for Google. Market sharconcerns are not limited to the U.S. alone. The company s share in the U.K., where it continues tserve close to 90% of the market started slipping last year. Bing has gained from its focus on traveGoogle has retaliated by buying out a key player in the air segment of the travel market. It has alsincreased focus on other kinds of comparison shopping. We believe Google s search market sharis a key metric that could bear watching over the next year or so.

The growth of mobile search, especially through cell phones, could result in revenue loss. This ibecause the medium is distinctly different. It is quite possible that the person who searches fo

directions to stores picks up the product physically from e store, thereby leaving the onlinpurchase unconsummated. If the digital wallet does not gain wide acceptance, Google would still noget paid unless the sale was completed online. Further, Google is in danger of losing market sharto companies, such as Microsoft and Apple. Since both these companies have control over mobilhardware, they may promote their own/any other search engine, by bundling it with the mobiloperating system they are selling.


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It is apparent that mobile search is cannibalistic to PC-based search, although there was markeexpansion initially, as users stayed connected for longer periods of time. However, as mobildevices get cheaper, more and more individuals and companies will be going the mobile route. Alsopersonal searches are increasingly getting transferred to the mobile platform. Google has hasteneto spruce up its mobile strategy and has engineers working on continued upgrades to its AndroiOS. With the iPhone going as strong as ever and Windows 7 getting on board Nokia phonesGoogle s competition continues to increase. Additionally, we think that mobile search is qualitativedifferent from PC-based search, so Google will most likely continue to invest here.

eBay and its payment unit Paypal have alleged that Google misappropriated trade secrets by buyinout key personnel employed at eBay and encouraging them to spirit away strategically criticainformation regarding Paypal s product roadmap, its prospective strategic partners, as well as detailed analysis of the problems with Google s existing system. The fact that Google engaged extended negotiations and meetings with Paypal over the past couple of years and obtained significant amount of information regarding Paypal to facilitate its incorporation into Android phoneand then abruptly changed plans just as the agreement was about to be signed does loosuspicious. eBay and Paypal are claiming willfully malicious behavior on the strength of which theare asking for punitive and exemplary damages (for irreparable harm), as well as an injunction tstop Google from using any of the trade secrets that were allegedly misappropriated. It will binteresting to see how the case unfolds, since it could go either way. But whatever the outcome, wsee Google parting with a good amount of cash.

In the fourth quarter of 2010, Google announced an across-the-board 10% increment and also hire1,000 people. Hiring increased still further in the first quarter, when the company added anothe1,900 people. The increased expenditure was on the R&D and S&M lines, most likely in an attempto build a position among the smaller advertisers and also increase focus on local and social. Eveconsidering the fact that the company will continue to grow revenues, the increased competition wcontain the growth rate. Of course, while higher costs will negatively impact the bottom line, a highelevel of non-operating income will be an offsetting factor.

There is a lack of diversification in Google s revenue source. The company is almost totaldependent on online search advertisement revenue, which has its share of ups and downs. Googl

introduced its Nexus One phone, but soon stopped selling it directly. Management revealed revenurunrates through display and mobile and also provided some indication of video monetizatiothrough YouTube. However, these revenue sources are still a small percentage of the total ancompetition will most definitely intensify going forward. There is great promise in the digital wallenot only for search-based revenue, but also for display and video ads, which Google could offer as part of its location-based services. However, execution will be key and resultant growth rates remauncertain as of now.

Google has made numerous attempts to build a position in the social segment. This is becaussocial networking through websites, such as Facebook and Twitter are places where people arsharing a lot of personal information and preferences that may be used to develop more customizeresults and thereby enable better targeting of advertisements. So far, Google s attempts have a

been flops, so Facebook and Twitter have really grown. Google needs a social platform to boost thamount of location-based commerce it generates through mobile devices. The recently-launcheGoogle+ could be a more successful attempt, but we will take a wait-and-see approach. The fact thapeople are spending more time on social networks means that they could stay away from searchinfor specific information through Google if their needs are met there. But we think Google remainquite effective in search and any shift toward social/development of social platforms happen ovetime. If Google+ achieves a certain amount of popularity, Google will be able to deal with th


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problem effectively. But if it is another failed attempt, Google would no doubt see some pressure oad revenue.

Google has locked horns with the Chinese government, which resulted in the closure of thGoogle.cn website. In the short time that the company operated its Chinese language website, took significant market share from home-grown Baidu.com. This could be one of the reasons thChinese government decided to get rid of Google, although the ostensible reason was noncompliance with Chinese law. China subsequently granted Google the license to continue, at thsame time specifying conditions that make its searches relatively less user-friendly. Googleposition in China is weakening as a result. However, we are still encouraged by the grant of licensbecause although China does not currently contribute much to the company s revenue, the Internetraffic in the country continues to grow strongly. This would have been a lost opportunity for GoogleMoreover, Android will no doubt make headway in the region too.

RECENT NEWS

In typical style,Google sthird-quarter earnings of $8.33 breezed past the Zacks Consensus Estimate o$7.59. Solid revenue growth across most geographies (other than Western Europe) and impressivgrowth in mobile drove results in the last quarter. Shares were up 6.37% in after -hours trading.

Historically, Google has done very much better than Yahoo,which could be up for sale and Microsofwhich has yet to gain critical mass. Google s superior algorithms have consistently attracted more userand generated better conversions.

Revenue

Google s gross revenue touched a record $9.72 billion, representing sequential and year-over-yeaincreases of 7.7% and 33.4%, respectively. Currency impact was again positive across the world, afte

taking into account the benefits of Google s hedging program.

Google is very strongly positioned in the mobile platform, where both smartphones and tablets have beemaking strong headway. The dominant position has enabled Google to generate mobile revenue at $2.5 billion runrate over the past 12 months. In fact, the company s position in mobile looks better than was in traditional computing, which says something about its strategic planning and execution.

Additionally, Google continues to benefit from the secular shift in advertising spending from offline tonline properties, increasing contribution from medium and small-sized advertisers, success of thDoubleClick ad exchange, improving search algorithms and better ad quality..


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Revenues from both Google-owned and partner sites continued to grow double-digits on a year-oveyear basis (they have grown double-digits each quarter over the last five years or so). Google websiteaccounted for around 69% of quarterly advertising revenue, while partner sites accounted for anothe27%. Total advertising revenue was up 7.1% sequentially and 32.8% year over year. Google-owned sitewere again stronger than partner sites.

Total traffic acquisition cost (the portion of revenue shared with Google s partners) was up 5.0%

sequentially and 22.4% from last year. However, traffic acquisition cost as a percentage of totaadvertising revenue was down 48 basis points (bps) sequentially and 199 bps from last year. Neadvertising revenue, excluding traffic acquisition cost was up 7.8% sequentially and 36.3% year oveyear.

Licensing and other fees brought in the remaining 4% of revenue in the last quarter, up 24.2%sequentially and 51.6% from September 2010.

Total revenue excluding total traffic acquisition costs came in at $7.51 billion, exceeding the ConsensuEstimate of $7.2 billion by 4.2%.

The U.S. generated around 54% of revenue, growing 27.5% sequentially and 40.6% from a year ago

The U.K., with an 11% revenue share, was up 7.6% sequentially and 25.0% from last year. Othemarkets accounted for the remaining 35% of revenue, representing a sequential decline of 13.5% anyear-over-year increase of 25.9%.

The sequential decline was largely related to weakness in some Western European markets. Googlstated that Australia, India and Brazil were notably strong in the last quarter and the position in Japacontinued to improve.

Revenue by Source

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11

Quarter Ending Date

US$(Millions)

Google sites Network sites Tota l Advertising Licensing & O ther


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MarginsThe gross margin of 65.2% was up 39 bps sequentially and 27 bps from the year-ago quarter. The grosmargin performance was the combined effect of solid revenues, a 13% sequential (28% year-over-yeaincrease in the number of paid clicks, and a 5% sequential decline (5% year-over-year increase) in thcost per click.

The number of paid clicks and cost per click appears significant, as they are indicative of higher volumecoming at lower prices. Google stated that the mobile and emerging market businesses were growinstrongly, which could be the reason.

Other costs, associated with data center operation, amortization of intangible assets, content acquisitioand credit card processing increased from the year-ago quarter, largely offsetting the increases in paiclicks and the cost per click.

Operating expenses of $3.28 billion were higher than the previous quarter s $2.97 billion. The operatinmargin was 31.5%, down 46 bps from the 31.9% recorded in the previous quarter and also down 350 bpfrom last year. R&D and S&M expenses increased as a percentage of sales from both the previous a nyear-ago quarters, while cost of sales and G&A declined as a percentage of sales.

Google has added a large number of people in recent quarters (nearly 2,600 in the last quarter itself)Other than fresh recruits, the company typically adds quite a few through acquisitions (it added MotorolMobility in the last quarter).

Non-operating income of $302 million increased from $204 million in the June quarter and $167 milliofrom last year.

Google reported net income of $2.73 billion, or 28.1% of sales, compared to $2.51 billion, or 27.8% osales in the June 2011 quarter and $2.17 billion, or 29.7% of sales in the year-ago quarter. GAA

Revenue and Margins

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11

Quarter Ending Date

US$(Millions)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Revenue Gross profit Operating Profit Gross Margin Operating Margin


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earnings of $8.33 a share jumped from $7.68 in the previous quarter and $6.72 in the September quarteof 2010. There were no special items in the last quarter.

Balance Sheet

Google has a solid balance sheet, with cash and short-term investments of nearly $42.6 billion, up $3.billion during the quarter. The company generated around $3.95 billion from operations in the last quarteand spent $680 million on capex, netting a free cash flow of $3.27 billion. Google s total debt wareduced by $1.93 billion during the last quarter.

Our Take

Google generates revenue primarily from the sale of advertising space on its online properties. Thcompany is therefore focused on protecting and growing its position in the search market througcontinued innovation and quality improvements. This focus has ensured that the company remains thdominant player in search, not just in the traditional computing segment, but even more so in themerging mobile space.

Google s Android OS has gone a long way to cementing its position in mobile. Google has also madacquisitions over time that have augmented its in-house capabilities.

With the growing importance of social networking, Google introduced Google Plus. The social platformappears to be gathering momentum, as management reported 40 million users (up from 10 millioreported last quarter).

Management stated that 100 new features were added to Google Plus during the quarter, which wahaving a positive impact on engagement. This is very good news, since Google needs its success isocial networking as a valuable data collection tool.

While some have commented that Google will not be as popular as Facebook, this is really not that mucof a concern and remains to be proved. In the meantime, it is obvious that social data will be aadditional tool for Google, which has been making a number of acquisitions and innovations in the space

Management stated that social relevance in search was already resulting in better conversions, althougdata is naturally limited given the stage of the business. We feel optimistic about Google s current effortin social.

Toward the end of last year, Google stepped up efforts targeting the small and medium business (SMBsegment. The SMB segment has played a key role in elevating Google s position in display and wexpect the company to take away some share from Yahoo, which is facing a number of problemsGoogle s success in display is very encouraging, since display advertising is expected to grow verstrongly over the next few years, surpassing search advertising by 2015.

Despite the initiatives to drive growth and superb execution to date that have enabled the company tmaintain share in a fast-growing market, Google shares have been range-bound, as investors remai

concerned about legal matters and China. China in particular has been a sore point, since the countryInternet usage has been growing exponentially and local players such as Baidu and Sohu.com remain government favor.


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VALUATION

Google shares are down 1.9% since the beginning of the year, compared to a 1 .5% decline for the S&500. The weak performance of Google shares was due to China, the management reorganization anincreased legal pressures. Shares plunged after the first quarter earnings miss, but soared post secondquarter results. They also traded up in the run-up to the third quarter earnings and have been flattis

since.

The shares are currently trading at a 19.2X trailing twelve months P/E, a significant discount to the peegroup, but ahead of the S&P 500. Shares are however trading at a premium to its closest competitoYahoo! Inc., which is justified.

While the shares have historically traded at a significant discount to peers, the forward P/E represents 90% discount, which is much higher than the average discount of 37% over the last five years. Wtherefore believe that there could be upside from these levels. Of course, much will depend on whetheGoogle is able to deliver on its growth plans, since its expected earnings growth rate of 19.3% is stbelow the 21.5% average growth rate expected of the peer group over the next 5 years.

Consequently, we are reiterating our Neutral recommendation on the shares and setting a price target of$622 (19.3X P/E).

Key Indicators

P/EF1

P/EF2

Est. 5-YrEPS Gr%

P/CF(TTM)

P/E(TTM)

P/E5-Yr

High(TTM)

P/E5-YrLow

(TTM)

Google Inc-CL A (GOOG) 18.4 15.4 19.3 19.4 19.2 59.7 16.7

Industry Average 186.5 202.8 21.5 23.7 31.8 147.4 19.7S&P 500 13.3 12.4 10.7 11.8 17.5 27.7 13.8

Yahoo! Inc (YHOO) 21.0 19.1 14.8 12.8 19.5 65.2 15.5Internet Gold (IGLD) 0.6 64.0 8.4

TTM is trailing 12 months; F1 is 2011 and F2 is 2012, CF is operating cash flow

P/BLastQtr.

P/B5-Yr High

P/B5-Yr Low

ROE (TT M )

D/ELast Qtr.

Div YieldLast Qtr.

EV/EBITDA(TTM)

Google Inc-CL A(GOOG) 3.2 10.5 3.1 20.0 0.1 0.0 12.6

Industry Average 3.5 3.5 3.5 0.8 0.4 0.4 95.0S&P 500 3.4 5.2 2.9 25.0 2.3


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Earnings Surprise and Estimate Revision History


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StockResearchWiki.com The Online Stock Research Community

Discover what other investors are saying about Google Inc-Cl A (GOOG) at StockResearchWiki.com:

http://www.stockresearchwiki.com/tiki -index.php?page=GOOG/Ticker

DISCLOSURES & DEFINITIONS

The analysts contributing to this report do not hold any shares of GOOG. The EPS and revenue forecasts are the Zacks Consensuestimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personviews as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirect

related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in threport is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to methe particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as aoffer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for thsecurities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six ttwelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelvmonths. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. Thcurrent distribution of Zacks Ratings is as follows on the 1025 companies covered: Outperform - 16.4%, Neutral - 75.8%, Underperform 6.9%Data is as of midnight on the business day immediately prior to this publication.

Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The modassigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. ZacRank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of

company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on eacstock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highevalues and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to thsecond, third, and fourth groups of stocks, respectively.
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zacks investment research - google - nov 1, 2011

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