Google Inc (GOOG) Among Monday’s Top Upgrades & Downgrades

This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines include a new buy rating for G-III Apparel Group, Ltd. (NASDAQ:GIII), and an upgrade for Northrop Grumman Corporation (NYSE:NOC). It’s not all good news, however, so let’s start off the day with a few words on why…

Google Inc (NASDAQ:GOOG) may not compute
The week started off on a down note for Google Inc (NASDAQ:GOOG) investors, as analysts at Pivotal Research cut their rating on the stock from buy to hold on worries that Google Inc (NASDAQ:GOOG)’s spending too much money building its own fiber-optic networks — when it should be focused on milking its core paid search business for mondo cash.

As quoted on StreetInsider.com today, Pivotal argues that Google Inc (NASDAQ:GOOG) is “spending hundreds of millions (and eventually billions?) of dollars on Google Inc (NASDAQ:GOOG) Fiber,” having just announced it is building out a network in Austin, Texas. While Pivotal hedges that the investment “may be justified because of the future-proofing aspects of the initiative,” the analyst points out that even if you like the strategy, it’s clearly “margin-eroding,” and will hurt Google Inc (NASDAQ:GOOG)’s ability to earn profits for its shareholders — laying fiber being a lot more cost-intensive than selling clicks.

This is particularly worrisome given that Google Inc (NASDAQ:GOOG) already arguably costs too much even at its current level of profitability. Priced north of $770 a share, Google stock costs about 24 times earnings, which seems quite a lot to pay for the sub-15% growth rate analysts assign the stock. Slow down that growth rate by “eroding” profit margins at Google, and the stock could be even more expensive than it already looks.

Long story short, I see Google shares as fairly priced today assuming (1) the company is valued on free cash flow rather than GAAP earnings, (2) it gets credit for its more than $40 billion in net cash, and (3) it maintains its expected growth rate, and suffers no margin erosion whatsoever. Remove any of the three legs from this tripod, however, and the case for buying Google keels over.

Could G-III “go to 11”?
On the other hand, the case for buying Google is still a whole lot stronger than the one that Brit banker Barclays just made for buying G-III Apparel Group, Ltd. (NASDAQ:GIII) this morning. Initiating coverage of the clothing manufacturer Monday, Barclays assigned G-III an overweight rating and a $46 price target, you see.