Cowen Boosts PT on Google (GOOG) to $840; New Structure Increases Transparency
Cowen and Company is out with commentary on Google (Nasdaq: GOOG)(Nasdaq: GOOGL) following news that the company has formed a new company in Alphabet. Cowen affirms Google at Outperform and boosts its price target from $775 up to $840.
Analyst John Blackledge noted the following implications with Monday's announcement:
- Leadership alignment. With the Alphabets move, GOOG ushers into the spotlight a new cadre of leaders (like Pichai) who will have autonomy over the internet business. For Page – Brin, it allows them to focus on longer-term, start-up oriented, and higher growth. The release states, “Alpha-bet refers to a return above the benchmark”;
- Reporting Transparency. Legacy GOOG is now in a wide array of businesses with different accounting standards, margin structures, and seasonality. Investors have been demanding better disclosure for many years; similarly, we have seen the positive impact AWS disclosure has had on AMZN stock;
- Valuation on SOTP Basis. We see this move as setting the table for a more coherent valuation process. It remains to be seen how deep the reporting, at minimum Core and Non-Core, or potentially approaching the point where the specific segments can be valued in their own right (e.g. Search, YouTube, etc.) and not be dragged down by the margin profile of, say, Fiber or X-Labs.
Blackledge also commented, We estimate that $3-5 billion in non-Core costs could be removed from Core with the new reporting, assuming ~25%-~40% of the ~$11 billion in incremental R&D and G&A from end of '11-'16 would be associated with non-core businesses, implying an additional $4/share (midpoint). GOOG is trading at 19x our 2016 EPS of $34, if we tack on $4, our new Price Target suggests 22x '16E P/E, which make sense given greater transparency and other potential upside levers (capital return program, YouTube breakout, etc). Our estimate implies Core EBITDA margins (net) of 55% vs. ~50% currently (Core + Non-Core).
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