Apr 15, 2011, 07.43 PM | Source: Reuters
Shares of Google Inc fell 6% on Friday, a day after the search giant reported a spike in spending, irking investors and prompting a rare downgrade by a brokerage.
Google's 54% spending surge in the first quarter made investors worry that its new chief executive may take his eye off the bottom line to chase revenue growth.
Citigroup analyst Mark Mahaney downgraded Google to "hold" and cut his price target on the stock to USD 650 from USD 750.
The search margins this year will be pressured by higher expenses that hurt first-quarter results, RBC Capital Markets analyst Ross Sandler said, and cut his price target on the search giant's stock to USD 680 from USD 700.
"The problem for most Google investors continues to be margin compression... and (this) is showing no signs of stalling," analyst Sandler wrote in a note to clients.
Under new Chief Executive Larry Page, Google is investing heavily to drive future growth, with an emphasis on social, Benchmark analyst Clayton Moranin wrote in a research note.
Analysts expect Page to keep spending on new products to spearhead an aggressive push into areas such as social networking and mobile businesses. Google executives said on Thursday the dramatically stepped-up spending was part of the company's plan to chase new business opportunities.
Benefit of doubt
While uncertainty around margin erosion likely weighs on the stock, it offers investors quality growth at a reasonable price, Benchmark's Moran said.
"Based on this track record, we give Google the benefit of the doubt that investments will pay off and scale over time," he said.
The returns on Google's prior investments in mobile and display businesses have been very good, but the returns on its new investments such as local and social search are uncertain, analyst Mahaney said.
"We believe Google is well positioned to generate positive returns over the next few quarters," Bank of America-Merrill Lynch analyst Justin Post said.
BofA and Benchmark retained their "buy" ratings on Google.
Shares of the company were down about 6% in pre-market trading, having closed at USD 578.51 on Thursday on Nasdaq.