Close

Bargins Surfacing in Internet Sector, but Don't 'Buy the Casket' - Deutsche Bank (AMZN) (FB) (GOOG) (YELP) (YNDX) (TRLA) (QQQ)

May 20, 2014 10:56 AM EDT
Get Alerts AMZN Hot Sheet
Price: $180.38 +0.31%

Rating Summary:
    65 Buy, 5 Hold, 1 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 13 | Down: 11 | New: 11
Join SI Premium – FREE

Analyst Ross Sandler of Deutsche Bank discussed the decline in internet stocks in a research note. Overall, he doesn't think investors should run out and buy every internet stock, but he does see value in a few names like Amazon.com, Inc. (NASDAQ: AMZN), Facebook, Inc. (NASDAQ: FB) and Google, Inc. (NASDAQ: GOOG). Other stocks mentioned positively include Yelp (NYSE: YELP), Yandex (NASDAQ: YNDX) and Trulia, Inc. (NYSE: TRLA).

Sandler also discussed 'tampering' with the definition of EBITDA. The report said names with the lowest earnings quality include Trulia, Inc. (NYSE: TRLA), ANGIE'S LIST (NASDAQ: ANGI), Web.com Group, Inc. (NASDAQ: WWWW), EXPEDIA (NASDAQ: EXPE), Demand Media (NYSE: DMD) and AOL (NYSE: AOL). ZILLOW (NASDAQ: Z) was also mentioned in the report.

"Exiting the biggest drubbing in recent history for internet in 1Q14, we have taken a step back to assess “where are we?” in terms of valuation. In 2013, the sector was up over 100%, and worryingly nearly ALL the performance came from multiple expansion (up over 90%) while “fundamentals” measured by upward EBITDA est revisions were only up ~10%. Our universe is ~39% down from 2013 peak mult., but still 5% above the average 2011-2012 valuation, hence we don’t see a “buy the casket” strategy as warranted, yet, but we do see some attractive risk/reward, including: AMZN, FB and GOOG in large cap, and YELP, YNDX, and TRLA in small caps," said Sandler.

"So what should investors do today? We continue to advocate “owning the barbell” strategy meaning one can own high and low multiple names, as it is impossible to predict which end of the curve will outperform. In the 2010-2012 era, the low multiple basket outperformed high multiple by nearly 60 percentage points. In 2013, the high multiple basket crushed low multiple by nearly the same 60 points. In 2014, low multiple is only down 5%, beating high multiple by 6 points. Stock selection is critical, and the one most obvious “performance killer” is owning post IPO high multiple names that come crashing down. This list historically includes names like GRPN, DMD, and others. In 2014, the play has been to short ALL 2011-2013 IPOs cohorts (north of $1B in market cap), but that obvious trend will likely reverse our for some of the higher quality names that have taken the biggest hits. The safest way to play the barbell strategy is to own a basket of low-multiple internets as over the longer term, value trumps other factors in stock selection. Value names either “earn their way higher” or stay flattish, which works in any environment," he continued.

"Lastly, we have seen an increased amount of tampering in the definition of EBITDA from consumer internet companies of late, as the universe expands and different business models enter the public market. The most aggressive companies measured by “adjustments” as a % of EBITDA (outside of adding back D+A and SBC to GAAP) include: TRLA, ANGI, WWWW, ANGI, EXPE, DMD and AOL. We also screened for most aggressive capitalizing of expenses such as software development costs, that list includes: Z, EXPE, and TRLA," he added.



Serious News for Serious Traders! Try StreetInsider.com Premium Free!

You May Also Be Interested In





Related Categories

Analyst Comments, Analyst EPS View, General News

Related Entities

Deutsche Bank, Earnings, IPO