Google Shares Upgraded At Atlantic Equities: YouTube, Mobile Search, Margin Improvements Point To $825 Valuation

In a report published Wednesday, Atlantic Equities analyst James Cordwell upgraded shares of Google Inc GOOG GOOGL to Overweight from Neutral with a price target boosted to $825 from a previous $560.

According to Cordwell, YouTube is growing "very rapidly" as the streaming video segment continues to benefit from the secular shift of video viewing online. Despite YouTube's 60 percent year-over-year viewing hours growth, YouTube represents only 5 percent of global TV viewing (excluding China), implying "significant" potential for future revenue growth.

Cordwell continued that as TV ad budgets continue shifting to the Internet, YouTube should see its revenue grow at a 50 percent-plus compounded annual growth rate through 2017 where it will record revenue of $14 billion at that time before reaching $50 billion in 2025.

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Cordwell also noted that his prior cautious thesis on the stock was based on the impact of the mobile transition on search. However, the analyst pointed out that Google Websites revenue growth suggests the company is navigating the transition "better than anticipated" and that mobile transition headwinds are no longer a concern. As such, key initiatives (i.e., vertical search, mobile buy buttons) will drive "steady improvements" in mobile CPCs.

Finally, Cordwell stated that his cautious tone also stemmed from ongoing margin pressures due to search-related concerns. The analyst pointed out that the last two quarters have demonstrated improved profitability – a trend which is expected to continue with a further 40 basis point margin improvements in 2016 and 2017 due to the "greater focus" of the company's new CFO.

Bottom line, Google's new corporate structure ("Alphabet") will show Google Inc's margins 350 basis points higher than the level reported for the consolidated group, implying 10 percent higher profits for the company, which represents the "key metric" for valuation purposes.