Google Update

Shares in Google have dropped 5% despite the technology giant reporting a first-quarter profit rise of 3%.

Profits were $3.45bn (£2.05bn), but investors are preoccupied by Google’s inability to maintain advertising prices.

A widely watched measure, the average “cost per click”, was down 9% from a year earlier.

Another weak spot highlighted in the report was the firm’s discounted sale of Motorola Mobility to Lenovo.

Google sold the smartphone maker to Lenovo in January for close to $3bn, after paying $12.5bn for the firm less than two years ago.

Despite investors’ reaction, Google’s chief executive, Larry Page, was upbeat: “We completed another great quarter,” he said in a statement.

“We got lots of product improvements done, especially on mobile. I’m also excited with progress on our emerging businesses.”

However, Google continues to struggle with its ability to charge advertisers higher prices for mobile ads, which are increasingly important with more and more consumers accessing Google’s browser through their smartphones.

Advertisers have proven reluctant to pay as much for ads on mobile screens compared to Google’s bread-and-butter desktop ads, which have been the main revenue generator at the firm.

Rates for mobile ads can be half as much as on personal computers, according to Needham & Co analyst Kerry Rice.

However, Google expects mobile ad prices to catch up with PCs eventually as it becomes easier for consumers to buy products using mobile devices, Google chief business officer Nikesh Arora said.

‘A little bit dodgy’

Google has greatly diversified its portfolio of products in recent years, speculatively branching out into phonesdronesGoogle Glass, and even thermostats and fire alarms, CNet technology analyst Larry Magid said.

“Some of these crazy ideas need to become less crazy and more profitable,” he told the BBC. “Their core business, what really brings in the money, that’s beginning to get a little bit dodgy for them.”

Google’s results were not the only ones to disappoint investors on Wednesday.

Technology giant IBM reported its lowest quarterly revenue in five years.

IBM attributed the drop in revenue, which went down 4% to $22.5bn, to weak hardware sales.

Enterprise technology spending has shifted away from traditional computing giants as governments and corporations move towards online services, large-scale data analysis and IT security, FBR analyst Dan Ives said.

Google – Adjusting for Stock Splits

GOOG : NASDAQ : US$543.14
BUY 
Target: US$700.00

Technology — Internet
ADJUSTING MODEL AND PRICE TARGET FOR STOCK SPLIT
Key points
 We are adjusting our estimates and price target purely to reflect
Google’s previously announced 2-for-1 stock split.
 Class A shares will trade under the new ticker GOOGL, while Class C
shares will assume the GOOG ticker. Newly issued shares going
forward will be Class C shares. Class A shares will have one vote
each, while the non-traded Class B (management) shares will have
10 votes each.
 Given that Class C GOOG shares should be more liquid than Class A
GOOGL shares and that there is a “make-good” provision in place to
close any potential value spread arising from the voting
discrepancy, we do not expect a significant spread to materialize
between the Class A and Class C shares.
Estimate changes
We are adjusting the number of shares to incorporate the stock
dividend. As a result, our share count goes to 685m, 689m and 693m
from 342m, 344m, and 346m in 2014, 2015 and 2016. As a result, our
non-GAAP EPS estimates go to $28.52, $33.61 and $39.01 from $57.04,
$67.22, and $78.02 in 2014, 2015 and 2016.
Valuation
We maintain our BUY recommendation and cut our price target from
$1,400 to $700 to adjust for the stock split. Our new target is based on
21x (unchanged) our 2015 non-GAAP EPS estimate of $33.61 (adjusted
from $67.22).

Google PLUS $1000

GOOG : NASDAQ 
BUY 
Target: US$1,000.00 PLUS

Technology — Internet
SOLID Q3 RESULTS
Summary
Google reported solid Q3 results that beat consensus for revenue and EPS by a few percent despite intra-quarter concerns that the rollout of Enhanced Campaigns would negatively impact advertiser behavior in the quarter. Websites revenue growth accelerated despite continued CPC shrinkage and made up for a big deceleration in Network revenue. With many investors already expecting a strong Q4 from EC impact, getting past this potentially bumpy Q3 with a solid set of results should allow the stock to work well through year-end.
Key points
 Bullish – Websites revenue growth accelerated to 22% from 18% in Q2 (albeit against an easy comp); positive TAC developments – network TAC was 70.5% of revenue, down from 72.3% in Q2 despite weaker Network revenue, which typically sheds low-TAC partners, and Web sites TAC was 8%, flat with Q2 and better than our estimate.
 Bearish – CPCs shrunk another 8% y/y as mobile/EC transition continues; Network revenue growth slowed to near zero y/y, decelerating sharply from a weak 7% in Q2; MMI lost >$300 million.
 Estimate changes – We are changing our 2013/2014/2015 combined gross revenue estimates to $59.4B/$67.8B/$77.9B from $59.4B/$68.6B/$78.6B and increasing non-GAAP EPS estimates to $44.37/$53.14/$64.04 from $43.99/$52.54/$62.99.
Valuation
We raise our price target to $1,000  PLUS from $940. Our new target is based on 19x (up from 18x) our slightly higher 2014 non-GAAP EPS estimate of $53.14 (up from $52.54).

Google BUY Target Price $ 940

Google 貼牌冰箱(Google Refrigerator)

Google 貼牌冰箱(Google Refrigerator) (Photo credit: Aray Chen)

GOOG

 NASDAQ : US$910.68
BUY 
Target: US$940.00

COMPANY DESCRIPTION:
Google owns the world’s largest search engine, some of the most visited websites on the web, including YouTube.com, as well as the telecommunications equipment corporation Motorola Mobility. Google generates the vast majority of its revenue through advertising on the web and mobile devices.

Summary


Google’s Q2 results saw both revenue and EPS below consensus. Q2 and Q3 seem like quarters of transition, first to a new Enhanced Campaign
paradigm for AdWords, and to a better user experience (and slower growth) for Google Network. We remain attracted to secular positives,
while recognizing that Google’s admirable quest to stay young and innovative may continue to push out realization of an “optimal” model.
The next chapter may be a big hardware cycle, which could draw questions about structural margins. However, we continue to like Google’s dominant competitive position in a large and growing market.
Key points
Bullish – Enhanced Campaigns now represent 75% of all AdWords campaigns, showing fast adoption; Android continues its massive climb with ~900 million activated devices; Web sites TAC slowed its pace of expansion at only 8.0%, up from 7.9% in Q1, the smallest expansion in years.
Bearish Revenue and profitability miss; 6% CPC decline despite adoption of Enhanced Campaigns; self-inflicted slowdown in Google
Network growth should persist for two more quarters, along with an associated pick up in Google Network TAC to over 72% of revenue
compared to long-time run-rate of ~70%.
 Estimate changes – We lower our 2013/2014/2015 combined gross revenue to $59.4B/$68.6B/$78.6B from $61.7B/$71.5B/81.6B, and
non-GAAP EPS to $43.99/$52.54/$62.99 from $46.72/$56.48/$64.82.
Valuation
We raise our price target to $940 from $890 as we roll over to 2014E EPS. Our new target is based on 18x our slightly lower 2014 EPS estimate of $52.54.

 

Rackspace Hosting HOLD

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RAX : NYSE : US$39.30
HOLD 
Target: US$37.00

COMPANY DESCRIPTION:
A provider of managed hosting and cloud computing services, Rackspace provides businesses with the infrastructure to house their data (web sites and applications), and with the customer support for their IT services need. Primarily focused on small businesses, Rackspace Hosting is known for its unique customer service experience known as “Fanatical Support”. The company is headquartered in San Antonio, Texas.

DARK CLOUDS REMAIN ON THE HORIZON; REDUCING PT TO $37
Investment recommendation
Despite recent estimate cuts, we believe additional downside risks remain given the increasing level of competition and the operating distraction we believe is resulting from the OpenStack transition. We believe aggressive competitive pricing pressures and continued momentum from competitors’ cloud eco-systems will likely make the OpenStack transition increasingly difficult. We are lowering our target multiple from 10x to 9x and our price target from $40 to $37accordingly.
Investment highlights
 Dedicated business likely further slows – We believe the increasing adoption of IT outsourcing to the public cloud will likely shift more
incremental demand away from traditional dedicated hosting services. Premium pricing, product cycle transition and continued sales force distraction due to OpenStack will likely make it difficult for Rackspace to regain momentum in its core dedicated business.
 Uphill battle for OpenStack – As Amazon AWS, Microsoft AzureVMWare and Google further penetrate respective cloud ecosystems, we believe it will be increasingly challenging for OpenStack to gain traction in the increasingly competitive market. The aggressive pricing strategy by AWS and matched by others will likely continue to create significant headwinds for companies like Rackspace.
 Still too early for bottom fishing – Despite the over 50% drop in share price from its recent peak, we believe it is still too early for bottom fishing given the continued downside risk and with its shares still valued at 9.7x 2014E EBITDA.

Pandora Media

Image representing Pandora Media as depicted i...

Image via CrunchBase

P : NYSE : US$16.57
BUY 
Target: US$18.00

COMPANY DESCRIPTION:
Pandora radio is the market leader in personalized Internet-based radio listening in the US. The company uses its proprietary algorithms as part of the Music Genome Project to generate playlists for users that are personalized and cater to the tastes of individual users.

Summary
While competitive developments continue, we believe fundamentals at Pandora remain strong heading into Q1 earnings next week. Our proprietary analysis points to a growing audio ad load (driven by robust adoption of the STRATA integration) and higher quality of advertisers
(big national brands). In addition, the temporary 40-hour listener cap on mobile appears poised to dampen content costs. As such, several
positives are coming to a head at once. Given the timing, Q1 impact is hard to gauge but likely positive, while impact to Q2 and beyond should
be more positive. Our best estimate is that guidance should be somewhat bullish without being irresponsibly aggressive.
Key points
 Our proprietary research (admittedly a small sample) indicates an audio ad load that has gone from 1.40 minutes per hour a month ago to 1.75 minutes currently. We believe this is being driven by sales force ramp, Triton measurement, and STRATA integration. This should drive higher RPMs.
 We also believe subscription revenue and content costs could both show improvement in Q1 from the 40-hour mobile cap, with more impact in Q2 and beyond.
 We believe Google’s newly announced $10/month “All Access” subscription service should have only a moderate competitive impact on Pandora’s listener base, which clearly likes free stuff.
Valuation
Our $18 target is unchanged and is based on 32x our F2017 EPS estimate of $0.90, discounted to present at 12.1%.

Blame It On Bill Gates ! PC Sales Slide

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Microsoft (MSFT : NASDAQ : US$28.79)
Dell (DELL : NASDAQ : US$14.10)
Hewlett-Packard (HPQ : NYSE : US$20.90)
According to IDC, personal computer sales fell 14% this quarter, on a year-over-year-basis, the largest decline
since IDC started tracking sales in 1994.

The research firm had forecast a 7.7% drop in the quarter. “At this point, unfortunately, it seems clear that the Windows 8 launch not only failed to provide a positive boost to the PC market, but appears to have slowed the market,” said Bob O’Donnell, IDC Program Vice President, Clients and Displays in IDC’s press release.

He added, “While some consumers appreciate the new form factors and touch capabilities of Windows 8, the radical changes to the UI, removal of the familiar Start button, and the costs associated with touch have made PCs a less attractive alternative to dedicated tablets and other competitive devices. Microsoft will have to make some very tough decisions moving forward if it wants to help reinvigorate the PC market. Separately, the Wall Street Journal reported that Microsoft is developing a smaller, 7-inch version of its Surface tablet, according to sources close to the matter.

One person familiar with Microsoft’s product plans said the 7-inch tablets weren’t part of the company’s strategy last year, but Microsoft executives realized they needed a response to the rapidly growing popularity of smaller tablets like Google’s (GOOG) 7-inch Nexus, which was announced last summer, and the 7.9-inch iPad Mini introduced by Apple (AAPL) last October.

Zillow Founders Meeting

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Z

NASDAQ :

US$45.59)
Zillow CEO Spencer Rascoff, founders Lloyd Frink and Rich Barton, and VP of Rentals (& former CEO of Rentjuice) David Vivero. :
Analyst  believe rentals could contribute lightly to revenue in 2013 with a greater impact in 2014.

Graham continues to believe Zillow is attacking a large, nascent market with alacrity. Zillow hopes to bring ~1 million rental listings onto the platform by year-end, which would be ~1,000 additions per day for the rest of the year. Once this milestone is reached, management believes it can pursue monetization through several mechanisms.

Graham believes there is a “micro-TAM” of rental property manager marketing spend available for an online platform like Zillow’s that is greater than $500 million annually. In other updates, Graham believes Zillow’s broker relationships remain strong, an expanding real estate market is good for business, and the recently announced Google Now partnership could contribute meaningfully to visitor growth. Zillow operates a leading
network of real-estate sites with a clear mission to provide vital services to most of the real estate supply chain, including homeowners, buyers, sellers, renters, real estate agents, mortgage professionals, landlords, and property managers.

Google Stealth Climb

Google 貼牌冰箱(Google Refrigerator)

Google 貼牌冰箱(Google Refrigerator) (Photo credit: Aray Chen)

GOOG :

NASDAQ : US$805.85)
Let me Google this for you.

While all eyes have been on Apple’s (AAPL) decline over the past six months, Google has quietly seen its shares appreciate by more than $125, finally crossing the $800 mark on Tuesday.

The most recent leg of the rally started late last month after Google reported solid Q4 results. Earnings were $10.65 per share on revenue of $12.9 billion (ex-Motorola) while analysts were expecting $10.58 on $12.73 billion (ex-Motorola). Canaccord  Analyst Michael Graham notes that paid click growth remained strong despite volume-limiting policy changes.

Additionally, Nexus smartphone device sales appeared strong in the quarter while Motorola margin dilution continued to move out of the picture. IN Graham’s most recent monthly review, he noted that his screen on Google improved due to some upward estimate revisions following the
earnings release and accelerated growth interest while short interest continues to decline. Some positive metrics: core U.S. search queries grew 11% from the prior year, the first sign of growth in five months and comScore reported that traffic to Google Sites grew by 4% in December.

Graham believes investors have regained high hopes for Google for 2013 after a solid  Q4 report, and he notes the potential for significant multiple expansion if the company continue to instill confidence with another quarter or two of stable, predictable results.

Humana (HUM : NYSE : US$73.19), Net Change

Google Q4 Preview

Image representing Google as depicted in Crunc...

Image via CrunchBase

Google

GOOG : NASDAQ : US$724.93
BUY  Target: US$810.00

COMPANY DESCRIPTION:
Google owns the world’s largest search engine, some of the most visited websites on the web, including YouTube.com, as well as the  telecommunications equipment corporation Motorola Mobility. Google generates the vast majority of its revenue through advertising on the web and mobile devices.

Q4 PREVIEW: TRIMMING 2013 & 2014 ON KEY MODEL DYNAMICS
Summary
Google reports Q4 results on Tuesday, January 22. We believe expectations are largely reasonable, although we note there are more moving parts than normal in the model (the basis for our 2013-14 revisions) that could add to volatility around earnings.
Key Points
 We are trimming estimates for 2013 and 2014 based on

1) nearterm PLA dynamics,

2) Nexus-related gross margin dilution,

3) ongoing TAC escalation, and

4) lower MMI estimates.

Our new 2013 revenue and EPS estimates are $62.8 billion/$46.37, down from $64.9 billion/$50.57.
 Of note, we believe that Google gross margin, which should continue to trend lower for a few quarters, should have a good chance of
bottoming around Q3, as we forecast Nexus subsidies can shift from headwind to tailwind, more than offsetting what we see as a continued climb in TAC (and we introduce a working framework for forecasting TAC mix within).
Valuation
Our $810 price target is unchanged and is based on 17.5x our revised 2013 EPS estimate of $46.37.

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