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Morgan Stanley Downgrades Google on Margin Worries

Shares of Google fell after Morgan Stanley downgraded the company to "equal weight," saying its margins will decline due to hiring concerns and higher spending on advertising for new products. Morgan Stanley cut its price target to $600 from $645, according to the report.

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"Given Google’s aggressive hiring plans, rising compensation expense, and significant advertising spend on Chrome and other Google products, we expect EBITDA margin to decline in 2011 and 2012," a Morgan Stanley report noted.

The authors of the report wrote that they downgraded the stock due to a belief that Google’s newer businesses would not lead to significant revenue growth in the near term.

But some critics say Morgan Stanley's downgrading Google on margins is the wrong way to view the company.

"Investments are done today, results are going to come in the future and it is all about growth," Trip Chowdry, co-founder and Research Managing Director at Global Equities, told CNBC in an interview.

While some investors say Google's new ancillary businesses are driving the increase in revenue, Morgan Stanley believes Google's core ad quality initiatives and the launch of Google Instant are the more likely contributors.

"In 2011, we expect search and contextual ads to contribute 90 percent of Google’s net revenue," the document said.

Meanwhile, Bruce Upbin, Forbes managing editor, said the downgrading was justified, but that target margin was too high, and squeezed in the near-term. "They have to do it and they can't care what Wall Street thinks," Upbin said.

"It's a charge that was levied against Google years ago, before Eric Schmidt calmed down fears about investor spending... But Larry Page likes the investing growth, to not really care what Wall Street thinks near-term and maybe the market, is reacting to some of that expectations," Upbin said.

According to the Morgan Stanley report, Google is well-positioned for the long-term, given success with Android, Chrome, and Apps, but Morgan Stanley expects muted share performance during the elevated investment cycle.

Google is in a war for talent, as a result of rising costs from Facebook competition, Upbin said.

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Disclosures:

Trip Chowdry owns no shares in the companied mentioed above.

Disclosure information was not available for Bruce Upbin or his company.

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