Lehman Says Google Looks Good

It ups the stock to buy, saying search pricing fears are overblown.
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Lehman Brothers slapped a buy on

Google

(GOOG) - Get Report

Tuesday, arguing recent concerns about pricing power in the paid-search sector are overblown and that the company will probably beat first-quarter revenue estimates.

Lehman, which has an investment banking relationship with Google, maintained its $230 price target on the stock, about 24% above its Monday close of $185.29. In premarket trading Tuesday, Google shares were up $4.04, or 2.2%, to $189.33. The stock closed at $210 as recently as Feb. 3 and bottomed out at $172.57 on March 14.

"Although there has been much concern around sponsored search pricing trends during the quarter, our tracking and checks suggest that overall pricing has undergone only a modest sequential decline that is in line with our expectations given seasonality associated with the fourth-quarter shopping period," the brokerage wrote.

Fears were stoked by a Feb. 24 downgrade of Google and

Yahoo!

(YHOO)

by RBC analyst Jordan Rohan, who predicted Google's first-quarter domestic pricing was likely to fall by a percentage in the double-digits.

Lehman estimates that overall keyword pricing fell 3% sequentially in the first quarter, with business picking up in March. Moreover, the brokerage doesn't believe pricing is the key driver of success in the search space, saying query volume, coverage and click-through rates are bigger factors.

"Accordingly, we believe that Google's recent efforts in driving better monetization of its platform have been focused more on improving the relevancy of ads and expanding overall search term coverage," Lehman said. "We believe we have only seen the early impact of Google's efforts to improve monetization over the past two quarters."

Lehman expects Google to earn 91 cents a share on a pro forma basis on revenue of $739 million in the quarter, above Wall Street consensus estimates for earnings of 91 cents a share on revenue of $728 million. At about $185, Google's shares are "as attractive as they have been at any point over the last several months," Lehman said.

Yahoo! rose 18 cents to $35.25 in Tuesday premarket trading.