Google Inc GOOG

Q4 Expectations Correction Creates Market Multiple Opportunity

•GOOG Reported A Modest Beat Q4 — $4.95B in Revenue & $6.79 in Non-GAAP EPS vs. our/Street estimates of revenue of $4.83B/$4.92B & EPS of $6.33/$6.48. 13% Q/Q revenue growth was light, however, vs. high-end estimates of 15%+.

•Fundamental Trends Improved – Organic Y/Y gross revenue growth of 16% accel’d vs. Q3’s 13%, tho’ comp was 5 pts easier -- so no inflection quarter. And Op. Margin of 55.7% (vs. our 55.0% est.) was up approximately 480 bps Y/Y. This was GOOG’s highest margin in nearly 4 years. Op. Income grew 28% Y/Y.

•Positives & Negatives Largely Balanced – Positives: 1) Operating margin results; 2) TAC costs dropping; Negatives: 1) No expectations blowout; 2) No fundamentals blowout. Paid Click (+13% Y/Y) & CPC (+5% Y/Y) trends largely as expected.

•Modestly Raising Estimates But Maintaining $640 PT – ’10 EPS from $27.12 to $28.49, assuming 23% Revenue Growth & 60 bps Op. Margin expansion. $640 = 20X 2011 EPS of $32.

•Reiterate Buy — Our Long Thesis is: 1) The worst of Macro headwinds are now behind GOOG; 2) CPCs – GOOG’s most important cyclical driver – have turned; 3) Paid Click growth is stable (and may accelerate with SmartPhones); 4) Moderate Capex/Personnel Spend & New Discipline imply n-t margin expansion; 5) EPS quality continues to improve; 6) Mobile Search momentum is building; & 7) Display Advertising/YouTube continue to build as large & profitable opportunities.

•The Pitch & The Overhangs -- @ $558, one can buy GOOG at 17X ’10 EPS (ex- Cash). So one can buy GOOG (w/25%+ growth) at a Market Multiple in advance of its easiest comps quarters & before the likely positive impact on GOOG’s P&L from Mobile, Display & New Ad Formats is apparent. Overhangs: China, Apple relationship, Nexus One de-leverage impact. Full report HERE

Google [morgan stanley] CQ4: Raising Estimates

Solid CQ4 though revenue below 'whispers' – Net revenue growth of +13% Q/Q was in line with MS and ahead of consensus of +11%. ‘Whisper’ numbers as high as +17% helped cause a negative reaction in after hours trading that we believe creates a buying opportunity as we are raising our C2010E net revenue / op. EPS estimates by 8% / 13%, respectively.

Solid results – Gross revenue of $6.7B (+17% Y/Y, +12% Q/Q) vs. MS +18% Y/Y. Net revenue (ex-TAC) of $5.0B (+17% Y/Y, +13% Q/Q) in line with MS / consensus. Adj. EBITDA of $3.1B (+23% Y/Y, 63% margin) slightly above MS / Street. Op. EPS (ex. stock comp) of $6.79 vs. MS / Street $6.62 / $6.44 owing to lower-than-estimated R&D and stock comp expense.

Raising estimates on rising confidence in outlook – First pass C2010E net revenue to $21.8B (+25% Y/Y) vs. prior $20.3B, operating EPS to $28.87 (+24% Y/Y) vs. $25.66. Assumptions include cost per click (CPC) from $0.52 in CQ4 to $0.55 by CQ4:10E; paid click growth of 15% vs. 15% in C2009; headcount growth of 1-2% per quarter (vs. 0% in C2009) with opex per head of $360 (vs. ~$330 in prior 3 years) and capex of $1.7B vs. $810MM Y/Y. Our new DCF of $665 assumes very little incremental revenue from material opportunities related to display advertising, YouTube, mobile and enterprise, implying our post C2010E assumptions could prove conservative.

CQ4 highlights – 1) After a first-half scare, business returned to seasonal growth patterns and CPC continued to rise Q/Q; 2) display ad efforts gaining ‘material traction’ following recent investments; 3) strong momentum in mobile (Android share gains, ad opportunity, mobile offerings like maps, turn-by-turn GPS...); 4) free cash flow of $2.5B grew +43% Y/Y and outpaced our $2B estimate; and 5) management is upbeat. full report here