Goldman Sees 30+% Upside in Google

Goldman Sachs advises investors to buy Google (NASDAQ:GOOG) with 30%-plus upside to their $620 price target. Firm has increased confidence in their view given new analytical framework developed from the paid lead growth details included in the 10K that supports their above-consensus 2007 yoy revenue growth of 55%.

55% top-line growth and 45% operating income growth, faster than 32% growth in invested capital, results in ~400 bps of ROIC expansion. GSCO views ROIC as the best measure of Google achieving a return on investment given it's the sum total of the effect of spending on the overall business. 1Q should begin the acceleration in FCF growth and ROIC expansion.

Firm estimates Google's ROIC will expand ~400 bps to 42.2% (versus the large-cap average of 15.1%) and free cash flow (FCF) growth will accelerate to 76% yoy in 2007 after a significant increase in investment caused ROIC to decline to 38% in 2006 from 81% in 2005 and FCF, while robust at $2.3bn, to experience a significant deceleration in growth to 3% 1Q2007E FCF growth acceleration to 74% yoy and 270 bps of ROIC expansion to 47.8% should start to alleviate investor concerns on costs, potential over-investment without a return, or share losses due to Panama, while reinforcing firm's view of that Google is creating value with its spend. Maintains Buy.

Notablecalls: I suspect there will be some nice buy interest in GOOG today.