Updated from 8:01 a.m. EST
UBS took a daring stance on
, initiating the gassed-up shares at reduce on grounds the popular search engine could see slowing growth and margin deterioration in the coming year.
The brokerage set a price target of $160, almost $25 below its Thursday close and a stark departure from other Wall Street research houses who have touted the shares at $200. Google was recently down $12.62, or 7%, to $172.08.
"We consider Google a great company but believe investors will see better entry points in the future," UBS wrote. The brokerage predicted the company will see slower growth, margin deterioration in 2005, and a lower valuation as investors switch their focus from earnings before interest, taxes, depreciation and amortization to free cash flow.
It also noted that the float of shares available for trading is going to grow by 233% before the end of the year.
While conservative relative to other analysts, the UBS model implies a multiple of 60 times 2006 free cash flow, hardly a stingy estimate. In focusing on that metric rather than EBITDA, the brokerage cited the company's absence of net operating loss carryforwards and a need for "very large" capital expenditures, an obligation not captured in the latter.
UBS warned that growth in revenue from keyword search could be crimped if local advertising doesn't pick up, and argued that operating margin will fall to 50% in 2005 from 57% in 2004 because of a higher research and development expense and depreciation.
"We could be overly aggressive in our assumptions, but we suspect that Google will hire as many high-quality engineers and other employees it can find regardless of margin impact in the short term," the brokerage wrote.
In a separate report, UBS initiated
with a neutral rating, saying the company is fairly valued at current levels. Its $37 price target comes out to 30 times 2006 enterprise value divided by EBITDA.