Google stock trades sideways despite standout results

Google put up another quarter of eye-popping growth in revenues, profits and market share gains, but the stock traded sideways on Friday as the results contained few surprises to drive shares higher.

The Web search leader said Thursday that second-quarter net profit more than doubled, aided by a lower tax rate and a shift toward in-house advertising rather than through partners, as revenue grew 77 percent, in line with Wall Street forecasts.

In the absence of new reasons to pound the table on behalf of the stock, bullish Google analysts mostly rehearsed their arguments for why Google stock could still hit $450, $500 and even $600 over the next 12-months.

Google shares were up $1.38 to $388.50 in afternoon trading Friday. The stock is off 6 percent for the year to date.

"Everything was solid. But, obviously, for the first time, they didn't blow away their numbers," said Martin Pyykkonen, an analyst with brokerage Global Crown Capital of San Francisco.

"The momentum investors are going to look at Google and say 'We are at reality now. Why own the stock?'" Pyykkonen said.

More than 30 financial analysts raised their earnings estimates on Google in the wake of the report. Only two--BMO's Lee Westerfield and UBS's Benjamin Schachter--trimmed their outlook, according to Reuters Estimates data.

Google's results also showed it took further market share from rival Yahoo in the Web search market. Google, which derives virtually all its revenue from Web search advertising, enjoyed a 9 percent rise in revenue between March and June, while Yahoo grew 3 percent.

Pyykkonen calculates Yahoo's Web search ad business grew only 1.5 percent, meaning Google gained substantial share. Yahoo said this week it would further delay an upgraded system designed to attack Google's edge in Web search ads.

An earnings warning by Dell and fears of a computer chip price war that could damage Advanced Micro Devices also weighed on technology stocks.

Goldman Sachs said there's a 25 percent upside to Google's stock, highlighting the positive tone of management's comments that it expected to wring more money out of its advertising system even in the sluggish third-quarter season.

Stifel Nicolaus analyst Scott Devitt said in a note to clients that Google's earnings power remains underappreciated relative to that of its peers, even as its revenue grows more than twice as fast Yahoo's and eBay's.

Google's stock trades about 30 times Devitt's 2007 year earnings estimates, compared with the price-to-earnings multiples of Yahoo, at 25, and eBay, at about 20.

"We believe amongst Google, eBay and Yahoo, that it is most likely that Google's earnings power is the most underestimated of the three," Devitt wrote.

Piper Jaffray analyst Safa Rashtchy reiterated his $600 price target on Google but used his rising earnings expectations into 2007 as an opportunity to pare back his valuation assumptions to 46 times 2007 earnings from 50 times.

"We also believe that the lowered multiple is warranted given the increasingly large scale of the business," Rashtchy said, adding, "We would be active buyers of Google ahead of what typically is a much stronger second half."