A previous version of this story listed Google as an iPhone maker. TheStreet apologizes for this error.
NEW YORK (TheStreet) –– Google (GOOGL) shares were falling in early trading Friday after Bank of America Merrill Lynch downgraded the Internet giant to "neutral," citing several factors including worries about the search business and increasing competition from Apple (AAPL) and Facebook (FB) .
Analyst Justin Post lowered his rating and cut his price target to $580 from $600 on grounds that the company's major revenue driver, its search business, may be nearing maturity. He pointed out that Google hasn't had a major product launch this year, an event which might have offset slowing revenue growth.
"While Google continues to improve ad targeting, measurements and ad products (local Product Listing Ads, Estimated Total Conversions), there has been no new big ad product launch this year to offset slower search revenue growth (estimated at 8-9% in US)," Post penned in the note. "Also, with Google targeting cloud computing, local retail delivery, video, and the Internet of Things (IoT), we expect elevated capex (up 50% y/y LTM) and hiring (up 22% y/y in 3Q) to drive continued margin pressure,
more than is baked into street estimates."
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He now expects Google to earn $33.81 a share in 2016, well below Wall Street's estimate of $35.77, while expecting the company to generate $73.72 billion in revenue, down from a previous outlook $74.44 billion. Wall Street's revenue consensus is at $73.4 billion.
In the third quarter, Google missed Wall Street estimates badly, as paid clicks rose just 17% year over year and 2% sequentially. On the conference call, Chief Financial Officer Patrick Pichette tried to squash those concerns, that the company's search business was maturing. Mountain View, Calif.-based Google reported earnings of $6.35 a share for the third quarter on $13.17 billion in revenue, excluding traffic acquisition costs. Analysts surveyed by Thomson Reuters expected the company to earn $6.53 a share on $13.198 billion in revenue.
Shares of Google's Class C stock (GOOG) were lower in early Friday trading, falling 0.95% to $532.20. The Class B shares were down 0.95% as well, trading at $537.40.
Not only are there major concerns about its core business maturing, but Apple's exceptionally strong product cycle this year, led by the iPhone 6 and new MacBooks, as well as concerns about its search deal with Apple's Safari browser, also cause for concern.
"Apple is having a strong phone product cycle, which could benefit search activity, but is a potential headwind to Android," Post noted. "Also, according to press reports, Apple and Google's search agreement may expire in 1H'15, and we see risk that Apple switches default search providers given Android phone competition. While we wouldn't expect an International change, Mozilla recently switched to Yahoo search in the US (mostly PC), so a US change would not be unprecedented."
Mozilla's deal with Yahoo! (YHOO) was signed last month, but as Post rightly points out, the major concern for Google is not desktop share, it's mobile search share. Safari had over 45% of the mobile browser market in the U.S., and losing that would be an enormous blow for Google. Apple CEO Timothy D. Cook recently noted that Apple's only real competition is Google, so losing the Safari deal to be the default search engine is perhaps the biggest headline risk for the company going into 2015.
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