Thursday, April 15, 2010

U.S. search trends below $GOOG $YHOO $MSFT

We detail specific U.S. search trends below:
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  • Google — In March, GOOG accounted for 65.1% of U.S. queries, down 40 bps vs. February share of 65.5%, tho’ up 145 bps vs. March ’09 share of 63.7%. Google’s query volume growth of 10% Y/Y decel’d vs. February’s 14% Y/Y on flat Y/Y comps. Q1 query growth was 14% Y/Y vs. 20% Y/Y in Q4, and was a record low.
  • Microsoft — After 10 months, Bing has shown clear market share gains — from 8.4% to 11.7%. MSFT’s March share of U.S. queries was up 20 bps vs. February share of 11.5% and up 337 bps vs. March ’09 share of 8.3%. Also, MSFT had 51% Y/Y query volume growth in March vs. 55% in February. Q1 growth was 52% Y/Y vs. 42% Y/Y in Q4.
  •  Yahoo! — YHOO had 16.9% market share of U.S. search queries in March, up 10 bps M/M and down 362 bps Y/Y. This is the first month since Bing’s introduction in June-09 that YHOO’s query share has grown. YHOO had an 11% Y/Y query decline in March, vs. a 10% Y/Y decline in February. Q1 volume declined 10% Y/Y vs. a 0.5% Y/Y decline in Q4.


We derive our $640 target price for Google based on a Proforma P/E analysis.We apply a 20x multiple to our 2011 Proforma EPS (excl. stock based comp)estimate of approximately $31.86 to reach $637, which we have rounded up to$640. Our target multiple is largely driven off of growth assumptions, but wealso usually consider historical multiple ranges, relative sector multiples, andintangibles, such as management's execution track record. For context, we areestimating 23% EPS growth in 2010. Also for context, since the beginning of2007, Google has traded at a forward Proforma P/E multiple of between 12xand 36x, with an average of approximately 24x. Finally for context, GOOGcurrently trades at approximately 20x our '10 Proforma EPS.Note that our estimates have increased. As an offset, however, we havelowered our Target Multiple from 21X to 20X to acknowledge new overhangrisks on GOOG shares -- a) The risk that it may lose some Revenue & EPSopportunity in China; b) The risk that that it could be removed as the defaultSearch engine on Apple devices; and c) The risk that Nexus One sales couldnegatively impact GOOG Operating Margins. The removal of these overhangswould lead to multiple expansion, in our opinion.
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