Goldman Sachs Analyst Discusses Decline in Internet Stocks (AMZN) (EBAY) (LNKD) (PCLN) (TWTR) (FB) (GRPN) (P) (QQQ)

Internet sector multiples remain high but opportunities exists, said Goldman Sachs analyst Heath Terry in a research note. While multiples are still well above historical averages, he expects "divergence in performance" across the group.

Companies mentioned positively include Amazon.com, Inc. (NASDAQ: AMZN), eBay, Inc. (NASDAQ: EBAY), Endurance International (NASDAQ: EIGI), LinkedIn (NYSE: LNKD), Priceline.com, Inc. (NASDAQ: PCLN), RetailMeNot (NASDAQ: SALE), Shutterfly, Inc. (NASDAQ: SFLY), Twitter, Inc. (NYSE: TWTR), OPENTABLE (NASDAQ: OPEN), Groupon (NASDAQ: GRPN), Pandora (NYSE: P) and Facebook, Inc. (NASDAQ: FB).

"Forward EV/EBITDA multiples have declined 16% to 23X from a peak of 27X (Exhibit 3). This is still 51% above the 5-year average of 15X, although forward sales growth estimates of +25% are above the 5-year average of 19%. On a market-cap weighted EV/EBITDA multiple, the sector multiple of 18X is above the 5-year historical average of 15X, although more in line with the 1-year historical average (Exhibit 4). Of the 10 largest cap companies in Internet, six have multiples that remain above their 3 and 5 yr historical averages," said Terry.

"While sector multiples remain high, fundamentals offer some relative justification as the sector generates some of the highest growth rates (Exhibit 9) and returns across all sectors (Exhibit 7). Looking across sector valuations on a growth-adjusted basis, we view AMZN, EBAY, EIGI, FB, LNKD, PCLN, SALE, SFLY, and TWTR as attractive at current levels (Exhibits 14 and 15). As the market focuses more on profitability versus pure revenue growth, the companies that screen broadly in the top half for both free cash flow growth and yield are EIGI, LNKD, PCLN, SALE, SFLY, OPEN and GRPN (Exhibits 10 and 11); on the first five of these, we are currently Buy-rated or CL-Buy," he continued.

"We believe a portion of the recent outperformance and more recent underperformance can be tied to the balance of supply and demand in the equity issuances from IPOs, follow-on offerings, and M&A transactions. While investors may look to compare the current market environment to 1999/2000, as Exhibit 5 shows, there is still a considerable gap between that period and this one. However, in terms of recent supply that needs to be absorbed over time, the $73bn of equity issued in aggregate in the last three years is higher than any other 3-year period in history, excluding the 1999-2000 years," he added.

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