Analyst Comments on Correction in High Growth Internet Stocks (TWTR) (SALE) (SSTK) (YELP) (SPLK) (WDAY) (FEYE)

(Updated - April 3, 2014 1:57 PM EDT)

FireEye, Inc. (Nasdaq: FEYE), Workday, Inc. (NYSE: WDAY), and Splunk, Inc. (NYSE: SPLK) led tech stocks slower on Thursday, as the rout in high growth areas continued ahead of Friday’s important jobs number.

Earlier, analyst Blake Harper of Wunderlich commented on the recent correction and possible causes. In his view, several possible reasons include profit taking after big gains in 2013, expected rising interest rates, and an infusion of supply from IPOs, secondary offerings and lock-up expirations in the tech sector.

“Solid gains in 2012 followed by a banner year of performance in 2013 left many Internet stocks with inflated multiples and shorter-term, momentum-driven shareholders. Despite the strong sell off in this pocket of the market (see Figure 1), the overall performance of the S&P is up over 2% over the same time frame, with stronger performance in defensive sectors. With a lot of 2013 gains driven by multiple expansions, we view the reversion of 1-year forward multiples to their historical means as a good thing, especially with the underlying fundamentals and growth prospects still healthy,” said Harper.

“When looking at downside scenarios from higher discount rates of 12-15% in our DCF models, as well as 12 month forward valuation multiples that are reverting to their respective historical means for each of our stocks, more upside than downside seems likely in the stocks. We view the higher level of investments to be cyclical and supporting growth prospects, which are still a still a healthy 20-80%+ Y/Y for our group in FY14,” he added.

Stocks covered by Harper include RetailMeNot (Nasdaq: SALE), Shutterstock (Nasdaq: SSTK), Twitter (NYSE: TWTR), and Yelp (Nasdaq: YELP). Twitter is the only Sell-rated stock in the group. The others are rated Buy.

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