SunTrust's Bob Peck: Investor Concerns Over Google Are 'Valid' But 'Baked In'

In a report published Tuesday, SunTrust Robinson Humphrey analyst Bob Peck previewed Google Inc (NASDAQ: GOOG) (NASDAQ: GOOGL)'s upcoming earnings report, noting the company is investing "ahead of the curve" in many sectors and shares represent a positive risk to reward profile at current valuations.

Peck noted the U.S. dollar continued to strengthen during the quarter and will represent a headwind for Google as 56 percent of its revenues are derived internationally. The analyst said foreign exchange weakness may impact the discretionary ad budgets for multi-national corporations (particularly in the first quarter) that could leave an impact on Google's branded ad efforts.

Moreover, based on data from third-party providers, Google is seeing weakening quarter-over-quarter search trends and slowing paid click growth. In addition, the ongoing secular shift to mobile and the app ecosystem provides a short-term headwind, but has a long-term positive potential.

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Peck also stated that Google's appointment of Ruth Porat as Chief Financial Officer is a "positive development" for key areas of focus including greater disclosure around business lines and investments, but there is no visibility into timing or particulars.

Peck estimated Google will earn $6.44 in the first quarter on revenue of $14.088 billion. This compares to the Estimize Consensus (based on 105 estimates) earnings per share estimate of $6.79 and revenue estimate of $14.293 billion. The Wall Street Consensus estimate is looking for an earnings per share of $6.63 on revenue of $14.055 billion.

Key Concerns Heading Into The Print

Peck revisited the top five investor questions and concerns that the company should address in its upcoming report.

• Timing and type of shareholder friendly steps.
• Negative trends including foreign exchange and search metrics.
• European Union risks.
• Firefox and Safari browsers.
• Recently announced algo search changes.

Bottom line, Peck stated that shares of Google are trading at 17.5x $27.50 2016 GAAP EPS ex. Tax Adjusted Net Cash, for a PEG of approximately 1.1x. This is in contrast to large cap tech companies with a median PEG of approximately 1.5x – implying negative trends and potential risks are "baked in" at current valuation levels, implying a positively skewed risk to reward profile.