Morgan Stanley Says Shares Of Google Are Not As Cheap As They Appear

In a report published Tuesday, Morgan Stanley Analyst Benjamin Swinburne dove into Google Inc (NASDAQ: GOOG) (NASDAQ: GOOGL)'s business, noting that enthusiasm over its new Chief Financial Officer and sponsored app ads in Google Play are offset by a lower search outlook and increased foreign exchange risks.

Swinburne noted two areas where he is incrementally bullish. First, Google's new CFO Ruth Porat can be a "positive force" around creating greater visibility into investment spend, margins and hopes for capital returns. Second, the analyst stated that a new proprietary Google Play model showed how the app Paid Search opportunity can grow to a $1.2 billion business by 2016.

On the other hand, Swinburne is incrementally bearish on Google's core business, which may be slowing faster than previously expected given a slowing click growth in Search. Moreover, a lower inflation and GDP expectations translates to flat ad growth versus expectations of 2.3 percent growth.

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Swinburne said that bulls are eager to point towards the company's 19x forward 2016 earnings per share as being "too cheap" for a quality growth story like Google. However, it is important to understand that Google's capex has grown from $3.3 billion in 2012 to $11 billion in 2014. In addition, depreciation and amortization will catch up to capex and put downward pressure on future earnings.

Bottom line, Swinburne lowered his 2015 revenue growth to 7.9 percent from a prior 13.1 percent growth expectations. The analyst also lowered his 2015 earnings per share estimate to $24.73 from a previous $28.43 due to continuing cash opex spend.

Shares of Google "L" shares remain Equal-weighted with an unchanged $565 price target.