We believe 2Q results debunk the major Google bear cases: desktop search is declining (it's not), expense growth will be faster than revenue growth (not the case), YouTube growth is facing competition (viewership growth fastest in 2 years), and capex spend will only balloon (capex was down in 2Q). In the absence of these bear points, a blossoming bull case emerges, one where incremental revenue from Google's growth businesses (YouTube and mobile search) more than offsets legacy deceleration, one where the company explains and shows care for resource allocation, and one where the stock trades at a reasonable valuation relative to anything else in digital media. We enthusiastically reiterate our Buy rating and raise our target price to $800.

Strength in core Google Sites revenue. YoY constant currency revenue growth of +18% modestly accelerated from +17% last quarter, driven by strength in the core search business. US revenue accelerated by 500bps vs last quarter to +16% YoY, the fastest US growth in six quarters, driven by YouTube and programmatic, with retail/ travel verticals contributing.

Mobile search monetization improving. The gap between mobile and desktop search CPCs search continues to narrow. The company highlighted a focus on user quality, and online-to-offline efforts as both lifting conversion. Ongoing improvement in measurement tools and ad unit performance are further supporting growth in mobile CPCs.

YouTube growth accelerates. 2Q15 YouTube viewership increased +60% YoY, the fastest growth rate in two years, and mobile watch time more than doubled from a year ago. Metrics provided on the call highlight that for younger demographics, incremental YouTube viewership is being sourced from cable TV; Google Preferred commitments in the US are up 3x YoY.

Opex and capex discipline shines through. Operating margins of 33.6% in 2Q15 not only beat our estimates of 31.1%, but also expanded 140bps YoY, demonstrating the company's ongoing expense discipline. Headcount additions declined to 1,729, the 3rd straight quarter of decline. We were also encouraged by the decline in capex, which was down materially both QoQ and YoY. As such, YoY FCF grew +50% in the quarter.

Valuation remains reasonable. Using aftermarket valuation, Google trades at less than 16x our new 2017E EPS of ~$39/ share. Our new $800 target implies 21x our roughly EPS target, reasonable given our forecast of sustained mid-teens revenue growth and improving profitability.

Target Price: USD 800.00

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