Wall Street doesn't think that the $5 billion EU fine will slow Google down - but one analyst says there's another, overlooked cause for concern

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• Analysts who cover Google don't expect that the $5 billion fine imposed on the company by the European Union to cause much harm to the business.
• According to reports published Wednesday by finanacial analysts, Google is largely expected to meet Wall Street expectations.
• Ben Schachter, senior analyst at Macquarie Research, posted a gloomier note. He complained that Google withholds too much information and that this makes it more difficult to evaluate the company.
• Schacter also stood out from others for advising caution when it comes to valuing Google's side businesses.

Wall Street is starting to place its bets ahead of Google's second-quarter earnings report on Monday.

So far, expectations among analysts differ very little - with one notable exception.

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Most financial analysts say they believe that Wednesday's big news, the $5 billion fine imposed on Google by the European Union, represents little to no threat to the overall health of Google's business in the short- and medium- term.

Beyond that timeframe, there are some concerns that some of the restrictions imposed on Google by the EU could benefit some of Google's competitors. The EU's competition watchdog demands that Google end or alter several trade practices.

European regulators claim Google forced manufacturers to pre-install its browser and search apps on their mobile devices, and also paid manufacturers to exclusively preinstall Google search. According to the EU, this stifled competition. Google also allegedly broke the law by preventing device makers from running alternative versions of Android - known as forks - that would enable owners to run derivative software, such as Amazon's Fire OS.

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Many on Wall Street were unimpressed with the allegations or the fine.

"We view the European Commission's ruling against Google as a bit misguided, but likely a relatively minor inconvenience in the short and medium terms," wrote Colin Sebastian, senior research analyst for Baird Equity Research. "Longer term, we see modest (but not unexpected) added risk from requirements to support forked versions of Android, and secondly, from the direct and/or indirect benefits of this ruling for Apple and Amazon."

As for the other growth areas in Google's business, such as advertising, cloud enterprise and retail, they appear to be running smoothly, according to analysts.

John Blackledge at Cowen Equity Research wrote Wednesday that his firm spoke to a digital advertising agency that spends $1 billion in US digital advertising "across paid search and paid social channels."

That agency told Cowen that spending on Google search was up between 15% to 20% due in part to strong demand for mobile, and the growing number of ad impressions.

"Mobile continues to drive Google Search spend (in the view of Cowen's advertising source)," Blackledge wrote.

One analyst report, however, stood out for taking a much different view.

A word of caution

Ben Schachter, senior analyst at Macquarie Research, said he is taking a much more cautious approach to the value of Alphabet Inc.'s stock. Alphabet is Google's parent company.

"We are increasingly frustrated with the lack of visibility into Google's core revenue drivers, and valuation is starting to become an issue," wrote Schachter, in his note published Wednesday. He has a neutral rating on Alphabet's shares.

The analyst complains that Google is less and less forthcoming with information about the financial performance of its many businesses. This has long been one of the Street's gripes about Google, but Schachter's premise is that things have become murky enough to sound warning bells.

Schachter wrote: "We are approaching a point where we, and we believe The Street collectively, are not understanding the size of search vs YouTube vs programmatic (advertising), which may lead to increasing volatility."

Schachter didn't stop there. In his report, the analyst called attention to the excitement on Wall Street over the potential size of self-driving cars and the early lead held in that nascent business by Waymo, Google's autonomous car operation. Schacter wrote "We remain cautious and want to see execution."

As for the many headlines recently generated about Google's other side ventures, such as the Google Home speaker, artificial intelligence, Cloud and YouTube, Schacter tried to separate reality from froth. He pointed out that in terms of revenue and profits, Google is still an advertising company at heart.

"Advertising today still represents 86% of revenues," the analyst wrote. "In our view, while there have been innumerable notes, articles, and discussions posted about all the fascinating technologies that Google is pursuing the single most important driver of the stock over the past five years is related to the number of ads it shows in its mobile search results."

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