A Citi's Analyst Reiterated His Buy on Google

Here is a copy from ClusterStock.com on August 8, 2008 :

Citigroup analyst Mark Mahaney reiterated his Buy on Google (GOOG) this morning, citing the fact that Google's Q2 "normalized" earnings would have been better were it not for abnormally large professional service fees and forex hedging losses (translation: They didn't really blow the quarter, at least not for reasons worth worrying about). Also, the new would-be Google killer "Cuil" (Qwee-il), is DOA.

Mahaney :


G&A soared $67MM from Q1 to Q2 to reach $441MM, a record high 11.3% of net revenue. The reason? Per the Q, GOOG had a $62MM Q/Q increase in professional services fees, the majority of which were legal costs. For context, professional fees increased $15MM from Q4 to Q1. These aren’t 1X charges, but the point is that the Q2 increase was a bit unusual and helps explain the Q2 G&A bump.

Interest Income plunged $109MM from Q1 to Q2 to $58MM. Reasons? Per the Q: 1) GOOG’s yield on its cash/investments went from 4.0% in Q1 to 2.8% in Q2; 2) GOOG went from a $47MM gain on market securities in Q1 to a $7MM gain in Q2; & 3) GOOG went from a $2MM FX gain in Q1 to a $43MM FX loss in Q2. These FX costs were due to more hedging activity under GOOG’s risk management program. The point? The Interest Income Lump in Q2 was unusual.
.

By Mahaney's calculations, Google's Q2 EPS would have been 19 cents higher and would have beaten analyst estimates were it not for these factors. Furthermore, Mahaney says that GOOG remains a buy because of strong organic growth and a new product cycle in 09 that includes benefits from display advertising in mobile search and video :


The 10Q Takeaway is that “normalized” Q2 results (assuming, say, only $30MM increased professional services fees & no FX hedging losses) could have been more like $4.81 vs. the $4.62 reported. But this isn’t a reason to Buy GOOG.

What are reasons to Buy are: 1. 30% organic bottom line growth in ’08 vs. a 25X P/E; 2. Potential opex leverage in ’09 from “normalized” personnel/capex spend; & most importantly, 3) Material new ’09 product cycles – Display Advertising, Video (YouTube), and Mobile Search.

Finally, Mahaney concludes by peeing on Cuil:


We’d be surprised if more Search engines weren’t launched, and we’d remind readers of Snap, which was launched shortly after GOOG’s IPO to significant fanfare. We’ve done our own (not statistically significant) sampling work on Cuil, and we conclude that the results aren’t nearly as relevant or as in-depth as Google. Our conclusion is that Cuil appears on the same growth trajectory as Snap... But we’ll continue to monitor it and the other search engines.


Mahaney reiterates his $610 Google target.

Related Posts :

Please Note!
This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.