Bear Stearns Upgrades Google

It sees its capital costs easing.
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Google's

(GOOG) - Get Report

fanbase got another lift from Wall Street Wednesday when Bear Stearns upgraded the shares to outperform and raised its year-end price target by 53% to $550.

Bear Stearns lauded a self-reinforcing "Google ecosystem" that should allow the Internet behemoth to grow while continually seeding new industries and attendant "sub-economies." While the ecosystem bodes well for the future, Bear said the higher price target reflects a one-percentage-point reduction in its estimate of Google's long-term cost of capital and higher revenue estimates.

For the fourth quarter of 2004, Bear expects Google to report pro forma earnings of $1.79 a share, up from its old estimate of $1.75 a share. The brokerage expects fourth-quarter revenue of $1.348 billion, up from $1.306 billion.

"Our revenue estimate is based on a 19% sequential increase (23% for Google.com and 13% for Google Network sites) in global search volumes for Google. Our EBITDA margins increases to 63% from 62% due to the increase in revenues, a greater portion of revenues from Google.com which carry higher margins, and leverage in the model," Bear said.

For 2006, Bear raised its revenue estimate to $6.8 billion from $6.55 billion, and raised its earnings estimate to $9 a share from $8.46. For 2007, Bear raised its revenue estimate to $10.1 billion from $8.3 billion, and raised its earnings estimate to $10.64 a share from $13.11.

"We think that there is less risk in Google's business model for the following reasons: 1) Our thinking that an ecosystem is developing around Google which could provide a lift in revenues, 2) Google's stronger balance sheet which it will use to ward off competition, 3) multiple product rollouts which should expand Google's revenue potential, 4) Google's continual market share gains, and 5) the fact that AOL is not in the hands of a major competitor," Bear said.

In premarket trading, Google $3.27, or 0.8%, to $438.50.