The Long And Short Of Yahoo And Google: Wall Street Flips Ratings For Internet Giants

by Joe Mandese, Feb 7, 2013, 7:44 AM

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The Wall Street equity gods giveth and they taketh away. This morning, they did both, boosting the outlook -- and rating -- for one Internet giant (Yahoo), and downgrading them for another (Google).

“We are downgrading Google to HOLD,” influential Pivotal Research Group analyst Brian Wieser wrote in an updated outlook that downgraded Google’s shares from a “BUY” rating. “The stock has risen close enough to our $820 target, and held in the high $700s following an overly positive response to the most recent quarter. However, beyond the valuation call, we are also concerned about the falling margins we think will come with Google's future growth.”

One of Wieser’s rationales is that while Google continues to expand strategically into vital new sectors -- especially mobile -- the costs of doing so are high, and its profits are projected to slip as a result.

"As we noted previously, for Google to achieve the advertising revenue forecasts we expect, growth will have to come from lower margin sources," Wieser explained, adding: "Further, as Google itself reiterated in its 10-K last week, 'the margins on advertising revenues from mobile devices and other newer advertising formats are generally lower than those from desktop computers and tablets. We expect this trend to continue to pressure our margins'."

One “potential offset” that should mitigate concerns for investors, according to Wieser, might also raise some for advertisers and consumers alike: “news that Google will no longer allow advertisers to only target mobile devices.

“Years ago, advertisers had to actively choose to include mobile advertising in their campaigns. Then Google changed a default which meant that, unless an advertiser indicated otherwise, a campaign would run on mobile devices.”

Wieser projects this tactic has led Google’s mobile revenue to skyrocket, though it was robbing from Peter to pay Paul, as “most of the money would have shown up on desktop.”

While it appears that Google is revising this policy, and will enable marketers to target device types more discreetly, Wieser says it corresponds with a broader shift on Madison Avenue that has been collapsing the “industry’s distinction between mobile and desktop” advertising.

“The divide will ultimately end as the industry and investors more fully appreciate that few if any advertisers spend money on the basis of geo-location or true mobility, and is instead a divide mostly based on devices, ad tech, and other operational considerations,” Wieser predicts.

Or as J.P. Morgan’s Doug Anmuth wrote: “By consolidating separate campaigns across desktop, smartphones, and tablets into a single campaign, Google is advancing a more holistic view toward search marketing and likely accelerating advertisers’ shift toward mobile.”

Unlike Pivotal’s Wieser, Anmuth did not downgrade Google’s outlook, but reiterated his “OVERWEIGHT” rating for Google shares.

“We believe Google is well-positioned in mobile given an advertising format that ports well to mobile, Android’s strong share, and largely untapped local opportunities. While there could be some near-term choppiness around full migration to Enhanced Campaigns in June, we believe simplifying the cross-device process in AdWords is a big step toward driving greater mobile dollars over time.”

Wieser, meanwhile, is upgrading Yahoo shares from “HOLD” to “BUY” for very different reasons -- mainly because of a shift toward “market-based pricing” at Yahoo Japan, news of a deal enabling Google to sell ads on Yahoo’s site, and perhaps most importantly, “favorable sentiment towards Yahoo's core business.

“The company announced [Tuesday] that it would allow Google to display ads on various properties using AdSense for Content and AdMob services,” Wieser explained, adding: “We think that Yahoo is likely giving little up in opening up its inventory to Google. Yahoo would be opening up some information about its properties (and, in some form, its users' actions) to Google, and this has some cost, but on balance, we presume that Yahoo would only allow Google to deliver ads where Yahoo was further ahead than if it did not work with Google.”

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