Wall Street Starts Cutting Google Estimates

As we said last week, one of the near-term headwinds for Google's stock is the likelihood that Wall Street will be cutting estimates for the company for a while. We have heard that Google's internal revenue-growth target for 2009 is about 15%, and the Street is still expecting 20%.

Also, the global economy is deteriorating rapidly. The vast majority of Google's growth is coming from international markets, and we find it almost inconceivable that Google will power through this unscathed.

AmTech's Rob Sanderson cut his Google estimates on Friday. His logic was 1) the rally of the dollar (FOREX has provided a major tailwind for the last several quarters), and 2) weakening global economy.  We expect other analysts will soon follow suit.

Sanderson:

We are cutting estimates for GOOG on a meaningful appreciation of the U.S. dollar and concerns of the spread of economic slow-down into continental Europe .

Key points:

• assuming no further gains in the dollar, currency will be ~$110m revenue drag in Q3 and ~$260m in Q4. Rolling constant exchange rates forward in our model takes ~$1.3 Billion from next year

• with some offset from lower dollar denominated costs of employees and network partners overseas, we estimate currency impact of ~$1.52 of EPS next year

• a currency hedge put on in June will provide a ~$285m gain (we expect a reclassification into revenue) – we assume short-term cap gains tax (18-month forward contracts) and estimate a $0.76 boost to EPS ($0.58 at long-term tax rate)

• we estimate a 5% gain in the dollar is ~$0.31 dilutive to EPS, net of a $0.26 shelter from the hedge last quarter - don ' t be surprised to see new hedges

• assumptions of economic slow-down represent ~60% of our EPS reduction. While the U.S./U.K. was hit early, spread across Europe seems unavoidable.  ROW contributed to 85% of GOOG's Q/Q revenue growth last quarter

See Also: Google Breaks $400...And Still Not Cheap