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Olympia Capital Markets Group Equity Research 12 Ma y 2010 Company Overview and Key Data Updating

Olympia Capital Markets Group

Equity Research

12 May 2010

Company Overview and Key Data

Updating Coverage

Google Inc. maintains an index of Websites and other online content, and makes this information freely
Google Inc. maintains an index of Websites and other
online content, and makes this information freely available
through its search engine to anyone with an Internet
connection. The Company’s automated search technology
helps people obtain nearly instant access to relevant
information from its online index. The Company generates
revenue primarily by delivering online advertising.
EPS
Mar
Jun
Sept
Dec
FY
2009A
$5.16
$5.36
$5.89
$6.79
$23.21
2010E
$6.76A
$6.79
$7.12
$7.33
$28.00
Source: Google Inc
..
SEC filings and Olympia Capital Markets Group Estimates
Google
(Nasdaq Global Markets: GOOG)
bbolan@olympiany.com
Market Capitalization:
Shares Outstanding:
12 May 2010
Brian Bolan
1 773 413 0285
52-Week Range:
Dividend Yield:
Source: Bloomberg
Price Target:
322.6 million
Share Price:
$164 billion
$384.69 -
$700.00
$508.00
$629.51
BUY
NA

Google Inc.

(Nasdaq GM: GOOG)

Mid Quarter Update

Summary

Search Market Share update – comScore qSearch released US search market share data yesterday showing Google lost search share, but analysis shows that the gains in market share by Yahoo! may be of particularly poor quality. We do not anticipate these results to affect our model at this time.

Android vs iPhone – 1Q10 was an excellent quarter for the Android operating system with several high profile device launches in the quarter including the Nexus One from Google. NPD released a report that states Android sales accounted for 28% of all smartphone sales in the quarter. The Nexus One may have gone from savior to suspect in less than one quarter as its future looks cloudy forcing us to reduce revenue estimates in each of the remaining quarters of 2010.

Google Travel - recent rumors of a Google acquisition of ITA Software primed the pump for a Google Travel site that would focus on highly qualified traffic for the online travel agents (OTA’s) and the metasearch companies that operate in the space.

Tablet Talk - Verizon has confirmed that it is partnering with Google on a tablet device that will compete directly with the instant success that is the iPad. An announcement for the Google Tablet could come at Google IO – a developers conference scheduled for May 19-20.

DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED AT THE END OF THE REPORT. Investors should consider Olympia Capital Markets Group Research as only a single factor in making their investment decision.

Olympia Capital Markets Group Research

Google (Nasdaq Global Markets: GOOG)

Inside

Mid Quarter Details

3

Nexus One

4

Conclusion and Valuation

5

Appendicies

6

Olympia Capital Markets Group Research

Google (Nasdaq Global Markets: GOOG)

Mid Quarter Update Detail

Search market share - comScore qSearch released US market share results yesterday that showed Google loosing market share to both Bing and Yahoo!. Yahoo!'s gain is a direct result of Yahoo! News using slideshows that appear to comScore to be searches. Perception is often the reality and this interpretation may not reach all market participants and could be viewed as a negative for Google. Yahoo! management noted on its most recent conference call that they believed they found a way to stabilize search market share and that they pay particular attention to the comScore releases. This leads us to believe that Yahoo! has implemented SEO tactics to "game the system" to achieve more favourable metrics.

Core Search Entity

Share of Searches (%)

 

Mar-10

Apr-10

Point Change

Apr-10 vs.

Mar-10

Total Core Search

100.0%

100.0%

N/A

Google Sites

65.1%

64.4%

-0.7

Yahoo! Sites

16.9%

17.7%

0.8

Microsoft Sites

11.7%

11.8%

0.1

Ask Network

3.8%

3.7%

-0.1

AOL LLC Network

2.5%

2.4%

-0.1

Source: comScore qSearch

Android beat iPhone - NPD report states that Android-based phones captured 28% of the market in 1Q10 compared to 21% for the iPhone and 36% for Blackberry. Android is gaining momentum, but it still has a long way to go as it accounts for only 9% of total market share. The launch of the Nexus One in the quarter certainly helped Google, but we believe that consumers are more impressed with the HTC Incredible. The Incredible received high praise from several reviews, and consumers bought roughly 100,000 of them in the first weekend of availability. Since that time, Verizon stores have not had any in stock and demand for the phone remains high as the two-week wait implies. This benefit to the Android platform may come at the expense of the Nexus One, which is not available in T- Mobile stores. Nexus One channel checks are much more difficult, but it appears as though there will be only one carrier of Nexus One as Verizon has focused instead on the Incredible and Sprint has focused on the HTC EVO 4G. We are reducing our sales estimates for the Nexus One over the next 3 quarters.

Google Travel -- Reports that Google has looked into buying ITA Software for $1 Billion have sent a shockwave through the online travel agency (OTA) industry. ITA Software provides complicated flight information to companies like Orbitz and Kayak.com. We believe this is the first step in what will eventually be known as Google Travel. We believe that a Google Travel entity will serve as a vertical search space that will encourage all the OTA's to allocate more budget to Google. Currently the metasearch players like Kayak and Fly.com are competing with traditional OTA's for keyword traffic from Google, so we can expect a Google Travel vertical to find a way to make searches for travel related keywords more clickable. This could increase traffic to OTA's but it will certainly make that traffic more qualified and thus more expensive.

Olympia Capital Markets Group Research

Google (Nasdaq Global Markets: GOOG)

Tablet Talk - After yesterday’s close, Verizon CEO was quoted as saying his company and Google are working together on a tablet style computer. This product has been rumored for some time and this conformation speaks more to Verizon not getting on the iPhone platform than it does the Google Tablet. It’s likely that an Android or Chrome OS-based tablet will have HTC as a primary manufacturer and could be announced by Google as early as next week at Google IO. The developer conference would provide an ideal setting to announce the tablet in front of 3,000 developers. If that is the case, we would not be surprised if the Nexus One continued on in a limited capacity as the focus shifts to the tablet. Based on the instant success of the iPad, we believe a Google Tablet will be just as successful provided Google partners with a Best Buy or similar retailer. The web-only sales channel for the Nexus One has to have played a major role in its disappointment to date.

Nexus One

We estimate that Google recognized about $100 million - $110 million in revenue from the

Nexus One in 1Q10.

Unit sales estimates of approximately 186,000 to 205,000 suggest a

phone that is weaker than many had expected, especially compared to the 74 days it took the iPhone to sell 1 million units. Some of the estimates imply a substantial uptick in units sold in the second half of March. We have produced a high and low end estimate of units sold below.

Olympia Capital Markets Group Research Google (Nasdaq Global Markets: GOOG) Tablet Talk - After yesterday’s close,

Source: Flurry and Olympia Capital Markets Group estimates

We are lowering our estimates for Nexus One sales in 2Q10, and throughout the remainder of the year. Most notably, we dropped our sales estimates in 4Q10 from $200 million to roughly $100 million during the important holiday season.

Olympia Capital Markets Group Research

Google (Nasdaq Global Markets: GOOG)

Investment Risks

If the company experiences any or all of the following risk factors, as well as others, the company’s stock price may be affected.

  • Advertisers reduce internet budgets. Advertising is the source of 99% of Google’s revenue. Should advertisers lose faith in the internet as a medium for advertisements Google would suffer a significant revenue slowdown.

  • A better advertising platform is developed for internet advertising. Search has been the dominant application on the internet for the last ten years. Should another application become more acceptable than search, advertisers could move budgets from search to that platform.

  • Competition is intense and moves quickly.

Google faces intense competition from

Yahoo! and Microsoft among others. Should a competitor develop a more efficient

and relevant search engine, Google would be adversely affected.

  • Future growth is predicated on success of mobile. Many of our assumptions of growth are based on the future success of all things mobile. Should Google’s Android open source operating system not be adopted by developers and carriers, its effectiveness would be adversely impacted.

  • Loss of key management.

A loss of the CEO or co-founders would be viewed as a

significant loss to the company.

  • Sustained weakness in the stock market. Portfolio liquidations and margin calls may force investors to sell positions in stocks, being a higher priced stock may make Google a likely candidate to be a source of funds.

Conclusion and Valuation

We are maintaining our Buy rating and a one-year price target of $700. Our estimates have changed for the remainder of the year as a result of our loss in confidence that the Nexus One will continue to gain sales. Weakness in the stock has presented a buying opportunity as broader market concerns have caused shar es to drop below $500 in recent trading.

In keeping with our 25x multiple of 2010 earnings of $28.00, we still achieve a price target of $700 per share.

Olympia Capital Markets Group Research

Google (Nasdaq Global Markets: GOOG)

Appendix

Olympia Capital Markets Group Research Google (Nasdaq Global Markets: GOOG) Appendix Source: Company filings and Olympi

Source: Company filings and Olympia Capital Markets Group estimates

Olympia Capital Markets Group Research

Google (Nasdaq Global Markets: GOOG)

Google 1Q10 Actual results vs. Estimates

Olympia Capital Markets Group Research Google (Nasdaq Global Markets: GOOG) Google 1Q10 Actual results vs. Estimates

Source: Company filings and Olympia Capital Markets Group estimates

Olympia Capital Markets Group Research

Google (Nasdaq Global Markets: GOOG)

Google, Inc (Nasdaq GM: GOOG)

Historical Price Chart

Olympia Capital Markets Group Research Google (Nasdaq Global Markets: GOOG) Google, Inc (Nasdaq GM: GOOG) Historical

GOOG 4/14/10 586.77

BUY

PT: $700

Source: BigCharts.com

Olympia Capital Markets Group Research

Google (Nasdaq Global Markets: GOOG)

Industry Research

Alternative Energy Industrials Homebuilders E-Commerce Internet

Analyst Team
Analyst Team

Paul J. Resnik, CFA

Evan Fox

Brian Bolan

Chief Market Strategist

Equity Analyst

Equity Analyst

Alternative Energy

Industrials / Homebuilders

Technology

presnik@olympiany.com

efox@olympiany.com

bbolan@olympiany.com

212.621.9634

212.621.9658

773.413.0285

Coverage Includes:

Coverage Includes:

Coverage Includes:

Archer Daniels Midland (ADM)

Tyco International (TYC)

FreightCar America Inc. (RAIL)

Google (GOOG)

Valero Energy Corp. (VLO)

Cummins Inc. (CMI)

Yahoo (YHOO)

Pacific Ethanol Inc. (PEIX) Verenium Corp. (VRNM) Lime Energy Co. (LIME) Green Plains Renewable Energy (GPRE)

Titan International (TWI) Standard Pacific Corp. (SPF) KB Homes (KBH) Toll Brothers (TOL) Textron (TXT)

China Yuchai (CYD)

Trading

Sean Murray

Tony Canarozzi

Head of Trading

V.P. Sales Trading

smurray@olympiany.com

tcanarozzi@olympiany.com

Trade Desk: 212.621.9696

Trade Desk: 212.621.9696

Direct: 212.621.9621

Direct: 212.621.9626

Sales

Jeff Girsky

Michael Arroyo

Chris Jacques

Managing Director

V.P. Institutional Sales

V.P. Institutional Sales

jgirsky@olympiany.com

marroyo@olympiany.com

cjacques@olympiany.com

212.621.9624

212.621.9636

212.621.9652

Olympia Capital Markets Group Research

Google (Nasdaq Global Markets: GOOG)

Important disclosures:

Analyst Certification:

The following analysts hereby certify that their views about the companies and securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Brian Bolan.

As of the date of this report, the analyst has no financial interest in any companies mentioned in this report.

Ratings:

Buy: The stock’s total return is expected to exceed 15% over the next 6-12 months.

Neutral: The stock is expected to have a positive return of less than 15% over the next 6-12 months.

Sell: The stock is expected to have a negative return over the next 6-12 months.

Olympia Capital Markets Group’s distribution of ratings is:

Buy 63%

Neutral 37%

Sell 0%

An investor’s decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Disclosures:

Olympia Capital Markets Group does not make a market in the shares of any stock mentioned in this report and has not received compensation from or expect to receive compensation from any company mentioned in this report.

This investment report contains information from sources believed to be reliable, but we do not guarantee its accuracy or completeness. Opinions expressed are subject to change without notice. This report should not be construed as a request to engage in any transaction. Olympia Capital Markets Group, or its affiliates, may own, take a position, make or market or engage in transactions with respect to the securities mentioned herein. This report is for informational use only. Additional information available on request. All rights reserved by Olympia Capital Markets Group.