ANALYSIS-How long can Google's shares stay airborne?

* Shares show resilience, so far

* Need to show results on mobile

* Privacy, antitrust scrutiny looms

NEW YORK/SAN FRANCISCO, Oct 17 (Reuters) - Google Inc's

shares have clung tenaciously near record highs after a

three-month, 30 percent rally fueled by rising optimism about

Internet advertising, but Wall Street fears it may be running

out of steam.

Google stock has hovered near an all-time high of $774.38

since touching that peak on Oct. 5. To break through that level,

investors and analysts say it needs to run a gauntlet of risks

that could undermine its status as technology's second-most

valuable company.

The most immediate concerns center on competition in the

mobile arena, which is shaping up as the main battleground for

tech supremacy among Google, Amazon.com Inc, Microsoft

Corp , Apple Inc and Facebook Inc.

Investors point out that Google's Android - despite being

the world's most-used mobile software - has yet to yield

significant revenue growth. And the company has not yet

articulated a coherent strategy in the wake of its $12.5 billion

acquisition in May of cellphone maker Motorola Mobility.

In the longer term, a rising wave of regulatory scrutiny

both at home and abroad could represent the single biggest risk

to the Google story. Regulators are looking into whether Google

is competing unfairly by favoring its own properties in its core

search product, and whether it inappropriately uses sensitive

personal data to target ads.

To be sure, of 45 investment brokerages that cover Google,

36 rate it a "buy" or "strong buy," with the median price target

standing at $845 - up another 12 percent from current levels -

and the most bullish target at $910. Among portfolio managers,

at least one maintains a $1,300 target, after factoring in

Google's growing cash and securities pile.

"Their business model alone makes them an incredibly easy

target for a whole bunch of legal matters," said Kim Forrest, an

analyst and portfolio manager at Fort Pitt Capital Group who

recently owned Google shares.

"To date they've done well managing it," Forrest said,

referring to Google's interactions with regulators. "But I think

it's their big risk. Most investors don't fully understand that,

professionals as well as retail."

ANTITRUST ANXIETIES

Google's run-ins with regulators over the years have invited

comparisons to Microsoft and IBM, two tech giants that

were once distracted and constrained by long-running antitrust

battles.

"They seem to be well-positioned in display ads and mobile,

which are nascent industries," said Connor Browne, portfolio

manager of the Thornburg Value Fund. "The biggest risk by far is

regulators bringing an antitrust case, a la the Microsoft

Internet Explorer suit that company faced.

"Our expectations are nothing material for the stock, but

that could be one of the reasons why the valuation is not higher

now."

Sources told Reuters last week that a majority of

commissioners at the U.S. Federal Trade Commission was poised to

recommend, possibly as early as November, that the government

bring an antitrust lawsuit against Google.

Several companies, including Yelp Inc, have accused

Google of tilting its search algorithm so that links to its own

subsidiaries appear more often in its search results. Google

processes two-thirds of all Internet queries in the United

States and roughly 90 percent in Europe.

But analogies to previous antitrust cases may be off-base,

analysts say.

The FTC is not likely to demand actions nearly as dramatic

as the forced breakup of telecom giant AT&T in 1984, but

the constant threat of antitrust investigations "makes it a more

highly scrutinized company and therefore they need to tread more

carefully than others," said Colin Sebastian, an analyst at

Robert W. Baird & Co.

"It becomes a perception issue" that could affect how

aggressively Google tweaks its search algorithms, he added.

A HIGH BAR

The bar for antitrust enforcement remains high. Regulators

must show that aside from stifling competitors, Google's actions

hurt consumers. Even if the FTC proceeds against the company, it

is unlikely to try to alter its strategy of developing the

Google+ social network, as well as its Maps and consumer review

products, into a comprehensive, searchable database of people

and businesses, analysts say. Rather, it is likely to press the

company to disclose which search results are generated from

Google properties, or seek other tweaks that the company has

seemed willing to make, analysts say.

"It's miles from Microsoft," said David Balto, a former FTC

policy director and antitrust lawyer. "It would be fruitless to

try to identify any consumer harm comparable to what Microsoft

engaged in."

More critical may be the search giant's regular

entanglements with privacy regulators, especially in Europe.

Google, like Yahoo Inc and Facebook, relies on the

ability to track users while they surf the Web as an essential

driver of its advertising business.

This week, European Union authorities threatened Google with

fines unless it amended its privacy policy after the company

consolidated user data across its products, like Gmail and

Google Plus, to better target advertising.

The risk is that it could get ensnared in complex,

pan-global privacy investigations that hamper its ability to

collect user data.

"Privacy is the bigger risk," said Sebastian, the Baird

analyst. "If Google were not allowed to target advertising, that

would hurt monetization. It's a headline risk that can cause

choppiness in the stock."

BY THE NUMBERS

Google itself has been clear that its biggest priority for

now is the mobile device battle with Apple, which Executive

Chairman Eric Schmidt called the "defining fight" of the

high-tech industry.

The Android operating system accounts for 56 percent of the

market, according to Strategy Analytics, but it is losing share

to one-time partner Apple, which surged from 23.2 percent market

share in the second quarter of 2012 to 33.2 percent a year later

on the back of strong sales of its iPhone 4S.

And the deal for Motorola, its largest-ever acquisition,

will remain under scrutiny until the division can turn a profit.

"It seems like every new business they've gone into has

diluted their net income. Shareholders would like to know how

they're going to get paid," said Forrest, who expects Google's

recent share gains to level out for the rest of the year.

"The biggest beneficiary of people adopting Android is

Microsoft, because they get paid an $8 license (per device) for

their patents."

COST PER CLICK

Some, however, see a lot to like in Google's prospects.

The company dominates search, and processes a full

two-thirds of all Internet queries in the United States.

Google also seems well-positioned to adjust to a sweeping

change in consumer behavior that is afflicting its peers. People

are spending increasing time on their smartphones and tablets,

but advertising rates on mobile devices command only 56 to 71

percent the price of ads - or "cost per click" - on laptops and

PCs, according to an Adobe Systems Inc study.

Google appeared to suffer a blip in the second quarter, when

it reported a 16 percent decline in its search ads' "cost per

click" compared with a year ago, but analysts say the long-term

forecast for Google's mobile transition remains upbeat.

With the help of its AdMob acquisition, completed last year,

and the rise of video advertising on its YouTube platform,

Google seems well-positioned.

Rising advertising rates for mobile searches and earnings

growth rates of over 20 percent over the next two years could

make the company's shares worth $1,300 in 2014, assuming a 15

times earnings multiple and factoring in cash, argued Browne,

who owns shares in his $2.1 billion Thornburg Value fund.

He said desktop searches should account for about 70 percent

of Google's total ad revenue, followed by display ads at 15

percent and mobile searches at 10 percent.

"We give them zero credit for Motorola, assuming no big

profits and no big losses," he said.

While his estimate is not as lofty, Paul Meeks, an analyst

at Saturna Capital who covers technology for the $2.2 billion

Amana Growth Fund, said shares of Google should trade at $854, a

13 percent jump from Wednesday's closing price of $755.49. He

arrived at that price by assuming a 15 multiple on next year's

projected earnings of $49 a share - a tad above Wall Street's

current average expectations - and adding in $113 per share

based on the company's large cash position.

"This is a company that starts with essentially a monopolist

position in desktop search, and now through Android they are

capturing more than half of the mobile ad revenue dollars,"

Meeks said.

But other investors in the company are preparing to pare

back or sell their positions after the recent run-up.

"The stock is more fairly valued now than it was when we

picked it up in the fourth quarter of last year," said Daniel

Morris, who manages the $4.3 million Manor Growth fund. Google

needs to show that it can wring profit from its growing number

of searches for the stock in order to move higher, he said.

The stock also tends to rise and fall with an advertising

market that is in turn tied to investor sentiment, said Steve

Sorrano, equities analyst for Calvert Investments. He said that

latecomers might not want to jump on the investor bandwagon

right now.

"It's easy to get hurt if you own that stock too late in the

cycle," he said.

(Editing by Edwin Chan and Matthew Lewis)

Source: http://news.yahoo.com/analysis-long-googles-shares-stay-airborne-214931316--sector.html

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