Morgan Stanley Reviews Google Earnings

In a report published Friday, analysts at Morgan Stanley maintained their Equal-Weight rating Google, Inc. GOOG. The price target has been maintained at $565. Although the company's valuation is favorable at present, as compared to its large-cap growth peers, the "highly profitable" search segment has been showing signs of faster than expected slowing. The company has reported its 1Q results largely below the consensus but ahead of the analysts' estimates, driven by decreased Fx headwinds. Revenue growth declined to 11 percent in the mature US market, especially due to the loss of the Mozilla search business. "US rev growth decelerated to 11% and was the lowest since 4Q:09, as YouTube strength was more than offset by lower search. Hiring and capital spending were also ahead of expectations," the analysts explained. Given that YouTube is likely to have witness US revenue growth of 40 percent in 1Q, the analysts estimate that Google's US search business is now growing at 9-10 percent. The company's revenue growth in the UK was also higher than estimated, at 12 percent constant currency. According to Morgan Stanley, "…YouTube and Play are large and growing businesses, they carry much lower margins than search. In fact, YouTube is likely not profitable today." The analysts believe that YouTube is likely to be a more effective driver of the company's reported sites revenue growth, PPC and CPC trends. In fact, Google believes that this business is helping to mitigate the impact of CPCs, with YouTube's CPCs being lower than previously anticipated.