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What Key Analyst Has to Say About Google Going Forward

Google Inc. (NASDAQ: GOOGL) has been under a lot of scrutiny following a strong earnings beat and the announcement of a new holding company. For many years, the company has been the face of Internet search, but this expansion with a new company will allow for a more-focused model. As a result, a key analyst weighed in on this search giant.

Argus maintained its Buy rating for Google with a price target of $850. The firm believes that Google’s new plan to create a holding company, called Alphabet, will provide more transparency for its startup businesses, and views it as a positive for investors. As Google has transitioned to a unified advertising model across both desktop and mobile devices, Argus has seen a decline in cost per click, though the decline has been moderating.

The company’s growth has been driven by its ability to accelerate revenue as advertising dollars shift to the internet, as well as by its extraordinary positioning as the search engine leader. Google is now in the midst of another paradigm shift — from desktop to mobile.

It has ramped up hiring and made acquisitions in order to expand on its core Internet search business and to develop fast-growing businesses like mobile and local search. These investments have led to margin compression in recent quarters. However, Google has maintained its dominant market share in core search and ramped up its display, YouTube and mobile businesses.

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Ruth Porat, the new chief financial officer, has promised expense discipline going forward, which should lead to expanding margins. Her first major victory was the second-quarter earnings report.

Argus detailed in its report:

Google’s growth could slow if it is unable to acquire the technologies, talent, and customers that management believes are necessary to sustain long-term performance. Other risks relate to the integration of acquisitions and the retention of key personnel in the highly competitive internet technology sector. Chief Business Officer Nikesh Aurora resigned in July, 2014, just the latest in a line of high level executives who have moved on to other internet-based companies. These include Sheryl Sandberg, now the COO of Facebook, and Marissa Mayer, who became CEO of Yahoo and then hired away Henrique De Castro.

Another real risk to Google is its highly competitive Internet advertising based businesses, which are subject to rapid and disruptive technological changes. According to the independent research firm, Google must keep up with, if not lead, such changes to remain relevant. Recent changes include the rapid adoption of mobile connectivity, with mobile search particularly important to Google’s business, and the rise of social networking sites that compete with Google for advertising dollars.

A shares of Google were down 0.6% at $686.16 late Wednesday morning. The stock has a consensus analyst price target of $645 and a 52-week trading range of $490.91 to $713.33. Google shares are up more than 29% year to date, compared to a 1% increase in the S&P 500 and a 2% increase in the S&P 500 Information Technology index.

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By Chris Lange