Google (GOOG) Investors' Worst Nightmare Plays Out

With shares of Google Inc. (Nasdaq: GOOG) under heavy pressure Friday, investors ask the question, "Is Google the Next Microsoft?"

This of course referring to Microsoft being dead money for years despite looking dirt cheap using various financial valuation metrics.

Google, for its part, is making one hell of a case that it is the next Microsoft, trading at a unthinkable forward P/E multiple of 15.5x and disappointing investors with ballooning expenses and weaker-than-expected EPS.

Shareholders are clearly concerned, sending shares down 7.8 percent to $533.46 at last check.

Wall Street however doesn't think Google's best days are behind it. In fact, Wall Street's finest were tripping over themselves to recommend buying the stock.

Here is a sampling of some of the comments heard from around the Street:

• Credit Suisse: "While GOOG's revenue growth has reaccelerated nicely (+27% in 1Q11 and 4% better than our est.), expense growth remains a key concern for the Street, resulting in a steeper than expected 337bp erosion in non-GAAP margin... While margins were disappointing, the revenue upside resulted in in-line profitability and we ultimately believe that absolute profit dollars drive value rather than just percentage margins... We remain comfortable with our 2011 EPS est. of ~$34." Maintains Outperform, buts price target from $750 to $700.
  
  
• Goldman Sachs: "We leave our gross revenue estimates unchanged, with Euro appreciation offsetting slightly lower US revenue. We reduce our EBITDA margin assumptions, and thus trim our 2011E/2012E/2013E EPS by 2% to $34.76, 3% to $39.84, and 4% to $44.83... Google investors may take solace from the fact that 1Q could mark the nadir for yoy margin shrinkage. We forecast EBITDA margin declines moderating from 590 bps in 1Q to 375 bps in 2Q, due partly to frontloading of vacation day carry-over catch-up costs. If the average Googler enjoyed 20 days carry-over (there are no limits on days carry-over in California), then Google paid an extra 2% compensation in 1Q2011 versus its 2Q2011 run-rate." Maintains Buy rating, lowers price target from $720 to $690.
  
  
• Deutsche Bank: "We remain buyers of Google shares on the current weakness, as the company delivered 16% op. profit dollar growth in 1Q, despite heavy re-investments in salaries & headcount. We think that operating profit dollar growth likely improves in future quarters/years while Google's fundamental positioning remains solid. In our opinion, the company is building user engagement via various platform technologies (Android, Chrome) & applications (search, Youtube, maps, payments) which help to balance user engagement built via social networking." Maintains Buy rating and $725 price target.

Citigroup was one of the few dissenters. The firm downgraded shares from Buy to Hold, while cutting its price target from $750 to $650. Analyst Mark Mahaney said, "with limited management disclosure suggests lack of discipline in a growth/competitive environment that simply isn't as open-ended as it was for GOOG prior to the Recession."

So while investors have very valid reasons to be worried about Google being dead money, this scenario playing out seems highly unlikely. It may not be too long before Google retraces to $600 and big money investors realize the disconnect.

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