Google Shares Slide After Morgan Stanley Downgrade

Analyst says 'consensus too optimistic'

Google may be ramping up innovation with new hires and competitive products, but investment bank Morgan Stanley says it’s not clear if the revenue will follow.

In a note to investors Thursday, Morgan Stanley also downgraded the company’s stock from overweight to equal-weight and cut its price target from $645 to $600. By midday Friday, Google’s stock price dipped more than 3 percent to about $529.

“Given Google’s aggressive hiring plans, rising compensation expense, and significant advertising spend on Chrome & other Google products, we expect EBITDA margin to decline in C2011/C2012,” Morgan Stanley analyst Scott Devitt said in the note.

Devitt also said “the consensus is too optimistic” on the revenue contributions of the company’s “newer” businesses, including DoubleClick, YouTube, AdMob, the Android Market and mobile search.

While he said he’s encouraged by the early developments of the company’s new social product Google Plus and deal site Google Offers, he added that Google will have to fend off rivals with first mover advantage.

Still, he left open the possibility that the company could rein in finances by slowing hiring, reducing advertising spending or curbing compensation, in which case he said shares could respond positively.

But not all analysts take a dim view of the company’s revenue prospects.

Earlier this week, Evercore Partners analyst Ken Sena upgraded his firm’s Google rating from equal-weight to overweight and increased the target from $620 to $670.

“Raising our rating…on a more favorable view of Google's long-term prospects in Social, Local, and Display, our belief [is] that spending and investigation concerns are largely reflected within current share price, and valuation,” he wrote.

Facebook competition, accelerated spending and the FTC’s antitrust investigation remain concerns, Sena said. But he emphasized that Google’s efforts in display, local, and social indicate an increase in the company’s competitive advantage.

Next Thursday, Google will report its second quarter earnings on a call with investors and analysts.