Pivotal Research Upgrades Google, Notes Company Has Expanded Better Than Expected

Brian Wieser of Pivotal Research Group upgraded shares of Google Inc GOOG GOOGL to Buy from Hold with a $610 price target.

"We have been generally negative on Google since early 2013, given our ongoing concerns about margin erosion, intensive capital investment plans and diversification (also capital intensive often) away from the company's core advertising business," Wieser wrote. The analyst adds that now the company has "generally expanded better than we thought it would" and that margin erosion "has not been quite as bad as we feared."

Wieser notes that Google's high margin paid search advertising business may decelerate while "middling" margin display-related advertising and low margin non advertising businesses continue to expand.

The analyst recognizes that Google could be more capital efficient if it were to return capital to shareholders and place a greater focus on advertising. However, this is not likely to occur, according to Wieser, who adds that "ongoing margin erosion and capital uses are effectively prices in at the stock's current levels."