Friday, July 18, 2008

Google GOOG bear case continued.

The last pillar of palace full with memories and sweet dreams about forgone Bull market is shaking: Google is firmly on track of our bearish scenario with further slowing growth, flat FCF and contracting multiple. We have wrote before http://sufiy.blogspot.com/2008/04/google-goog-has-deliveredanother.html about recent trends and now they are finally manifested in crashing stock price.
Trust is shaken and company is not immune to slowdown - sell off will continue and will surprise a lot of people with its magnitude: fear is much stronger feeling then greed. Our diagnoses is that company is at its peak in market share, biggest foreign market in UK is saturated and economy is in downswing there as well, it is still one trick pony and is feeling the hit of slowdown in economy. Financials were hit first, next is consumers, the advertising budgets are cut: first print media, TV; then web based as well.
On our bearish financial front signs of further deterioration are all over the recent report: Revenue Growth Q/Q has slowed -50% from 6% to 3%, Y/Y has slowed -33% from 58% to 39%. The same rate of decreasing rate of growth as in Q1 2008.
EPS growth was -5% Q/Q and 33% Y/Y. Yearly growth is still impressive, but nothing out of the ordinary in order to support bubble valuation in recession environment. Capex has decreased to 697,5 mil -17% Q/Q YouTube blades add broadband must be eating hard into the company's margin and it is desperate to cut it in order to save FCF. Cash Flow from operations was flat Q/Q. With a lot of spin around two closed offices are indication of drastic financial measures: boom is over.

Free Cash Flow in Q2 is 1068.6 plus 14% (in the Q1 FCF was 842 mil - here was a typo FCF was 937.8 mil). Company can play with TAC figures and reduce CAPEX further in order to deliver at least 4 bil FCF in 2008. But what will it tell us with further slowing growth rate in revenue? It means that company has hit a wall in its YouTube monetisation efforts and will start reduce even existing bleak expectation about break through on that front. Double Click purchase is dilutive to the rate of growth as well: display advertising will be cut first before click based.

With our prerecession multiple at 30 we will arrive to 120 billion market cap for Google which translates into USD377 target price.
Problem is that market is punishing the yesterday winner very brutally after missing its always overoptimistic expectations. I will put a crazy and heretic for a lot of bubble vision guests assumption that we will see in this bear market FCF multiple of 20 and Google's market cap at 80 bil (please put it in economic context guys: it is still Internet Advertisement Company, not water, bread or oil).
This valuation will translate into USD250 share price.

2 comments:

Anonymous said...

Can you provide more details on how you arrived at the market cap?

Anonymous said...

Hey --

I like this post. Suggestion -- next time, you should consider including a stock chart to show your readers what a rollercoaster ride Google shareholders have been on.

You can “Embed” any stock chart at http://www.wikinvest.com in your blog as easily as you would embed a YouTube video. This is a lot simpler than hitting print-screen on google finance, cropping down the image in a photo editor, uploading it to your blog, and putting it in your post.

And, an embedded Wikinvest chart is better for your readers because it’s interactive - your readers can click, drag, pan, zoom, and play with the chart on your site without a page refresh.

Here’s a good example of an embedded stock chart in action:

http://www.techcrunch.com/2008/07/31/wikinvest-gives-the-world-embeddable-interactive-stock-charts/

Could you try it out in one of your posts and let me know what you think / how we could improve the charts? - you can create your own chart at http://www.wikinvest.com/special/Embed_Stock_Chart?ticker=goog

Thanks!
Dan