* Shares show resilience, so far
* Need to show results on mobile
* Privacy, antitrust scrutiny looms
NEW YORK/SAN FRANCISCO, Oct 17 (Reuters) - Google Inc's
shares have clung tenaciously near record highs after a
three-month, 30 percent rally fueled by rising optimism about
Internet advertising, but Wall Street fears it may be running
out of steam.
Google stock has hovered near an all-time high of $774.38
since touching that peak on Oct. 5. To break through that level,
investors and analysts say it needs to run a gauntlet of risks
that could undermine its status as technology's second-most
valuable company.
The most immediate concerns center on competition in the
mobile arena, which is shaping up as the main battleground for
tech supremacy among Google, Amazon.com Inc, Microsoft
Corp , Apple Inc and Facebook Inc.
Investors point out that Google's Android - despite being
the world's most-used mobile software - has yet to yield
significant revenue growth. And the company has not yet
articulated a coherent strategy in the wake of its $12.5 billion
acquisition in May of cellphone maker Motorola Mobility.
In the longer term, a rising wave of regulatory scrutiny
both at home and abroad could represent the single biggest risk
to the Google story. Regulators are looking into whether Google
is competing unfairly by favoring its own properties in its core
search product, and whether it inappropriately uses sensitive
personal data to target ads.
To be sure, of 45 investment brokerages that cover Google,
36 rate it a "buy" or "strong buy," with the median price target
standing at $845 - up another 12 percent from current levels -
and the most bullish target at $910. Among portfolio managers,
at least one maintains a $1,300 target, after factoring in
Google's growing cash and securities pile.
"Their business model alone makes them an incredibly easy
target for a whole bunch of legal matters," said Kim Forrest, an
analyst and portfolio manager at Fort Pitt Capital Group who
recently owned Google shares.
"To date they've done well managing it," Forrest said,
referring to Google's interactions with regulators. "But I think
it's their big risk. Most investors don't fully understand that,
professionals as well as retail."
ANTITRUST ANXIETIES
Google's run-ins with regulators over the years have invited
comparisons to Microsoft and IBM, two tech giants that
were once distracted and constrained by long-running antitrust
battles.
"They seem to be well-positioned in display ads and mobile,
which are nascent industries," said Connor Browne, portfolio
manager of the Thornburg Value Fund. "The biggest risk by far is
regulators bringing an antitrust case, a la the Microsoft
Internet Explorer suit that company faced.
"Our expectations are nothing material for the stock, but
that could be one of the reasons why the valuation is not higher
now."
Sources told Reuters last week that a majority of
commissioners at the U.S. Federal Trade Commission was poised to
recommend, possibly as early as November, that the government
bring an antitrust lawsuit against Google.
Several companies, including Yelp Inc, have accused
Google of tilting its search algorithm so that links to its own
subsidiaries appear more often in its search results. Google
processes two-thirds of all Internet queries in the United
States and roughly 90 percent in Europe.
But analogies to previous antitrust cases may be off-base,
analysts say.
The FTC is not likely to demand actions nearly as dramatic
as the forced breakup of telecom giant AT&T in 1984, but
the constant threat of antitrust investigations "makes it a more
highly scrutinized company and therefore they need to tread more
carefully than others," said Colin Sebastian, an analyst at
Robert W. Baird & Co.
"It becomes a perception issue" that could affect how
aggressively Google tweaks its search algorithms, he added.
A HIGH BAR
The bar for antitrust enforcement remains high. Regulators
must show that aside from stifling competitors, Google's actions
hurt consumers. Even if the FTC proceeds against the company, it
is unlikely to try to alter its strategy of developing the
Google+ social network, as well as its Maps and consumer review
products, into a comprehensive, searchable database of people
and businesses, analysts say. Rather, it is likely to press the
company to disclose which search results are generated from
Google properties, or seek other tweaks that the company has
seemed willing to make, analysts say.
"It's miles from Microsoft," said David Balto, a former FTC
policy director and antitrust lawyer. "It would be fruitless to
try to identify any consumer harm comparable to what Microsoft
engaged in."
More critical may be the search giant's regular
entanglements with privacy regulators, especially in Europe.
Google, like Yahoo Inc and Facebook, relies on the
ability to track users while they surf the Web as an essential
driver of its advertising business.
This week, European Union authorities threatened Google with
fines unless it amended its privacy policy after the company
consolidated user data across its products, like Gmail and
Google Plus, to better target advertising.
The risk is that it could get ensnared in complex,
pan-global privacy investigations that hamper its ability to
collect user data.
"Privacy is the bigger risk," said Sebastian, the Baird
analyst. "If Google were not allowed to target advertising, that
would hurt monetization. It's a headline risk that can cause
choppiness in the stock."
BY THE NUMBERS
Google itself has been clear that its biggest priority for
now is the mobile device battle with Apple, which Executive
Chairman Eric Schmidt called the "defining fight" of the
high-tech industry.
The Android operating system accounts for 56 percent of the
market, according to Strategy Analytics, but it is losing share
to one-time partner Apple, which surged from 23.2 percent market
share in the second quarter of 2012 to 33.2 percent a year later
on the back of strong sales of its iPhone 4S.
And the deal for Motorola, its largest-ever acquisition,
will remain under scrutiny until the division can turn a profit.
"It seems like every new business they've gone into has
diluted their net income. Shareholders would like to know how
they're going to get paid," said Forrest, who expects Google's
recent share gains to level out for the rest of the year.
"The biggest beneficiary of people adopting Android is
Microsoft, because they get paid an $8 license (per device) for
their patents."
COST PER CLICK
Some, however, see a lot to like in Google's prospects.
The company dominates search, and processes a full
two-thirds of all Internet queries in the United States.
Google also seems well-positioned to adjust to a sweeping
change in consumer behavior that is afflicting its peers. People
are spending increasing time on their smartphones and tablets,
but advertising rates on mobile devices command only 56 to 71
percent the price of ads - or "cost per click" - on laptops and
PCs, according to an Adobe Systems Inc study.
Google appeared to suffer a blip in the second quarter, when
it reported a 16 percent decline in its search ads' "cost per
click" compared with a year ago, but analysts say the long-term
forecast for Google's mobile transition remains upbeat.
With the help of its AdMob acquisition, completed last year,
and the rise of video advertising on its YouTube platform,
Google seems well-positioned.
Rising advertising rates for mobile searches and earnings
growth rates of over 20 percent over the next two years could
make the company's shares worth $1,300 in 2014, assuming a 15
times earnings multiple and factoring in cash, argued Browne,
who owns shares in his $2.1 billion Thornburg Value fund.
He said desktop searches should account for about 70 percent
of Google's total ad revenue, followed by display ads at 15
percent and mobile searches at 10 percent.
"We give them zero credit for Motorola, assuming no big
profits and no big losses," he said.
While his estimate is not as lofty, Paul Meeks, an analyst
at Saturna Capital who covers technology for the $2.2 billion
Amana Growth Fund, said shares of Google should trade at $854, a
13 percent jump from Wednesday's closing price of $755.49. He
arrived at that price by assuming a 15 multiple on next year's
projected earnings of $49 a share - a tad above Wall Street's
current average expectations - and adding in $113 per share
based on the company's large cash position.
"This is a company that starts with essentially a monopolist
position in desktop search, and now through Android they are
capturing more than half of the mobile ad revenue dollars,"
Meeks said.
But other investors in the company are preparing to pare
back or sell their positions after the recent run-up.
"The stock is more fairly valued now than it was when we
picked it up in the fourth quarter of last year," said Daniel
Morris, who manages the $4.3 million Manor Growth fund. Google
needs to show that it can wring profit from its growing number
of searches for the stock in order to move higher, he said.
The stock also tends to rise and fall with an advertising
market that is in turn tied to investor sentiment, said Steve
Sorrano, equities analyst for Calvert Investments. He said that
latecomers might not want to jump on the investor bandwagon
right now.
"It's easy to get hurt if you own that stock too late in the
cycle," he said.
(Editing by Edwin Chan and Matthew Lewis)
