Google Keeps Its Glitter

Despite a 5% pullback, analysts are hard-pressed to find a reason to abandon the stock.
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Google's

(GOOG) - Get Report

stock may have slumped on the day after its second-quarter earnings report failed to meet the outsized expectations for the stock. But combing through analyst reports, you'd be hard-pressed to come up with any critical sentiments on the Internet search giant.

Google's net profit beat analyst estimates by 10 cents a share on a GAAP basis and 15 cents a share on a pro forma basis, and its revenue came in well ahead of what the Street had been forecasting.

But the stock was down as much as 5% Friday, recently tumbling below the $300 level.

Fast-charging stocks are often expected to achieve what the Street calls "beat and raise" reports -- they must beat analysts estimates and then raise guidance. But Google has blown away its numbers enough times that even a hint that the current quarter won't hold another blowout number is enough to push the stock down. And that's just what Google hinted at in its earnings call.

In other words, investors were disappointed in Google because they now don't expect to be as surprised as they thought they would be. If you can untangle that logic, there may be a career for you as a stock analyst.

For their part, analysts were busy raising their own numbers on Google, which again declined to help them with any official guidance. CEO Eric Schmidt did remind analysts that Google was in a seasonally slow quarter that may also face tough year-on-year comparisons. But that didn't stop one analyst from giving Google its very first $400 price target -- a number that has an

interesting history in the Internet sector.

The $400 price target came courtesy of Mark Rowen of Prudential Equity, which has no underwriting relationship with Google. Rowen has raised his price target on Google three previous times since the company went public. He also raised his EPS estimate for 2006 to $8.36 from $7.11. That's at the high end of the range of analyst estimates for next year. The mean figure stands at $6.97.

Rowen wasn't alone in revising his calculations upward. Anthony Noto of Goldman Sachs, which has an underwriting relationship with Google, revised his 2006 EPS estimate to $7.60 from $6.48; that gives what he called an "implied value" of the stock between $340 and $380.

If anything, the negative news coming out of Google's report concerned its chief rival in search,

Yahoo!

(YHOO)

. Lauren Rich Fine of Merrill Lynch pointed out that Yahoo!'s search revenue grew about half as fast as Google's did in the second quarter, suggesting it's giving up ground in the fertile search market.

"As such, we believe Yahoo! is losing search revenue share on its properties to Google but is remaining relatively competitive in the affiliate search arena," Fine wrote. Merrill has no investment-banking relationship with Google but plans to seek such business with Yahoo!

Without any formal guidance to hang on to, analysts were left to grope for meaning in the sometimes vague visionary statements of Google's executives. Robert Peck of Bear Stearns thought he detected a subtle but significant shift in Schmidt's comment that "We're very much going to be the leading provider of access to the world's information." Google had previously considered its mission to "organize the world's information."

"Schmidt's slight change in verbiage is very appropriate, as we think Google should be viewed more as an access point to, ultimately, unlimited information, anywhere in the world, in any language, at any time," wrote Peck, whose firm has no underwriting relationship with Google.

Peck urged investors to "envision the company as becoming less like a librarian and more like a potentially omniscient facilitator, enabling commerce, education, entertainment, and communication."

Which raises an interesting question: How do you calculate a target price for omniscience?