Google rating lowered by Morgan Stanley

Schmoogle cake? Morgan Stanley lowered its rating for Google a notch and trimmed its target, saying the search giant’s margins will shrink as it undertakes aggressive hiring and ramps up advertising for new products. “Given Google’s aggressive hiring plans, rising compensation expense, and significant advertising spend on Chrome and other Google products, we expect
EBITDA margin to decline in 2011 and 2012,” the firm said in a note to clients.

Morgan Stanley also has doubts over the ability of the company’s newer businesses, such as DoubleClick, Android Market and YouTube, to add to its revenues. “We see lots of promise from Google’s display/mobile/apps businesses, but we believe the consensus incorrectly attributes upside to those businesses and therefore may be overestimating their contribution in future periods,” wrote the firm. Most of Google’s revenue upside is coming from better management of its “core” search keyword ad business, and not the periphery, said Morgan Stanley.

As for efforts in local and social services, “We are encouraged by the early progress of Google Plus and Google Offers, but Google faces stiff competition from incumbents who have a first mover advantage. The pay-off of such endeavours may be longer-term in nature.”

Google (GOOG : NASDAQ : US$531.99), Net Change: -14.61, % Change: -2.67%, Volume: 4,751,268

About the Author

Canaccord Genuity Inc. is a global investment banking and institutional brokerage firm. Their website is www.canaccordgenuity.com.

For disclosures of any equities mentioned here please see: http://www.canaccordgenuity.com/en/ODD/pages/disclosures.aspx.

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