Is Google the Next Google?

The next Google (NASDAQ:GOOG) is Google, or so Morgan Stanley analyst Scott Devitt said when he added the technology giant to the firm’s “Best Ideas” list. And the company’s stock responded just as it has since Google’s disappointing third-quarter earnings report caused investors to sell out in droves — shares continued on their upward trajectory to a new high of $786.20.

Even though the company was hit with two analyst downgrades this week and a Neutral coverage launch by analysts at Sterne Agee, the stock was not stymied.

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But Devitt’s opinion is not shared by all. Analysts at BMO Capital Markets downgraded shares of Google to a market perform rating from an outperform on Monday. But they left their price target unchanged at $790, less than five dollars above where the stock has been trading for most of Friday, indicating that analysts think the company is running out of room to grow.

In the research note, the firm cited a change in customer sentiment, stemming from the market’s acceptance of “cost-per-click declines,” as the reason behind the rating drop. “This makes it a less compelling opportunity for value investors, and we also believe the benefit of growth investors rotating out of [Apple] in recent months could begin to abate,” the analysts wrote…
Google’s average cost-per-click has dropped for the past five consecutive quarters, after increasing for eight straight quarters; this metric is closely watched as it shows how much advertisers are paying on average when searchers actually click through on paid search keywords or on other ads. In early 2012, analysts began to worry that the computing shift towards smartphones was cannibalizing the more expensive advertisements on the non-mobile web.

Pivotal Research Group senior analyst Brian Wieser was also concerned about the company’s mobile advertising strategy. Wieser downgraded shares of Google from “buy” to “hold,” citing an “overly positive” response to the company’s most recently reported quarterly numbers, which showed that the company’s margins were shrinking more and more as advertising took place increasingly on mobile devices.

Still, Google’s shares have continued to migrate upwards, a sign of relative strength. That is what Devitt argued in his analysis of the company, which was seen by Forbes. He thinks Google can post a 15 percent free cash flow over the next five years as online advertisements increase market share of offline alternatives. Furthermore, Devitt said that the fourth quarter removed multiple overhangs on the stock. One of the problems that has been mitigated, is Google’s cost-per-click declines, which have moderated to the low-single digits.

Google is in the midst of redesigning AdWords, the company’s main advertising product, to maximize its advertising profits across all platforms.

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