Can Google Keep Rising?

Here’s an upbeat research report on Google from Needham & Co:

Google (GOOG) reported Third-quarter 2005 revenue well above expectations. Given the momentum in Google’s business, and the implied 10% upside from current levels to our new price target, we are raising our rating to Buy from Hold.
Gross revenue, which includes revenue both from Google’s owned and operating Web properties (proprietary) and from its partner sites (network), of $1.58 billion rose 96% year-over-year and 14% sequentially.
Net revenue, which exclude traffic acquisition costs, or the revenue share with network partners, exceeded the consensus mean of $943 million by 11%.
In all, growth was driven primarily by gains at Google’s owned and operated properties (up 20% sequentially), though Google’s network business was also solid (up 7% sequentially).
And despite an increase in the revenue share with network partners, the overall gross margin increased 170 basis points sequentially to 59% due to the greater mix of higher margin proprietary revenue.
Net revenue of $1.05 billion exceeded the consensus mean of $943 million by 11%. Operating earnings of $644 million exceeded the consensus mean by 8%.
The adjusted earnings per share of $1.50 exceeded the consensus mean of $1.36. Not surprisingly, incremental operating margins (using gross revenues) declined 180 basis points to 41%.
As usual, management did not provide guidance. Our revenue estimates increase due to the upside in the quarter and the likelihood of continued strong growth.
Our earnings estimates also benefit from an assumed increase in mix of higher margin proprietary revenue, and from our use of a lower effective tax rate in 2006 (from 35% to 30%, which alone increases our 2006 adjusted earnings-per-share estimate by 54 cents).
Given our new, higher forecasts and our shift to using 2007 forecasts to calculate our 12-month price target, we are raising our price target to $370 from $300.
Google remains the leading technology company in the consumer Internet space, and arguably has one of the best platforms for expansion into new high-growth consumer Internet services.
We continue to view Google as a core holding, and believe the company’s strong brand loyalty, the business’ substantial free cash flow and the team’s track record of innovation will lead to further gains.
— Mark May, CFA

Posted by on October 24th, 2005 at 8:22 am


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