Outlook for Internet Service Stocks

by: The Wall Street Transcript

The Wall Street Transcript recently interviewed Jason Helfstein, an Executive Director and Senior Analyst at Oppenheimer & Co. Inc. covering the broadcasting and media sectors. Key excerpts, including his outlook for Internet stocks, follows:

TWST: What are you telling investors to do at this juncture?

Mr. Helfstein: Our overall view has been trying to basically pick the companies that you think will be more resistant and will come out stronger. We've been recommending Google (NASDAQ:GOOG). The longer the economy stays weak, the more downward pressure is put on earnings estimates. That being said, we still see Google growing this year from a top-line standpoint, and we think they've got low-hanging fruit as far as the margin. There is a very small group of large cap companies that will grow earnings this year. So we like Google from that perspective, we like the analytics sector, again with comScore (NASDAQ:SCOR) growing. It's hard to find technology companies growing this year. We do still have a positive recommendation on Move, Inc. (NASDAQ:MOVE) just because it's exceptionally cheap at about 1 times EBITDA, but we acknowledge that that's probably not right now where people are focused on because of the liquidity concerns we've talked about. We also cover traditional media, and we try to focus people more toward the services side of the business where it's less advertising driven and the margins, the costs are more variable, so they can cut cost out as things remain weak. We've just tried to kind of limit where we think people should invest, until you get better visibility on the cycle. The truth is that valuations fell well below where people expected, less in media but just overall. Investors rightly so have been hesitant to buy stocks on valuation alone. They want to see stability to earnings, so not cutting earnings each quarter, and they also want to see what type of path they have for coming out.

TWST: As you look at Google longer term, where are their growth opportunities?

Mr. Helfstein: First of all, roughly half of Google's revenues are international, so that's still a significant opportunity. Meanwhile, one could argue that the US desktop search may be maturing; everybody you know uses Google basically. Internationally, you are still under-penetrated from a computer standpoint, and some people speculate in some companies, you may just skip PCs and go right to the mobile, but that's still an opportunity for them. At the end of the day, Google's expertise is organizing information for you to find it, basically helping you find information, whether it's desktop or mobile. So that's still a significant opportunity. I think they continue to provide tools to advertisers to fine-tune how they use search, so there's probably further opportunity there. There are newspapers that are going to go out of business or will stop delivering newspapers Monday to Thursday and there may only be weekend newspapers. Those advertisers, the local advertisers, will have to find another way to advertise. They're already spending on Google, but it probably gives them the opportunity to spend more on Google. Then, Google going with Android, their mobile software platform — who knows what will happen there? Does Google go anywhere with cloud computing? That's effectively giving smaller businesses access to supercomputing power and so it sounds like you rent the space but the question is still, what's the revenue model for that? But I think the core business for Google is still healthy and there are growth opportunities and that's why we continue to recommend the stock.

TWST: In the analytics space, is comScore the name of choice at this point? What sets them at the top of the list?

Mr. Helfstein: There are not that many in the space. I mean, there is Omniture (OMTR), which we used to cover. But really with comScore, in addition to their providing information about how many people go to what Websites, and they also have e-commerce data as far as how people are using the Web, they're more and more getting into effectiveness tools. So they can actually help their clients figure out whether or not what they're doing works. I think that's pretty invaluable. If they have a 50%, 55%, 60% market share in the core business, their market share in the ad effectiveness space is very small right now. So that's an opportunity. Plus, 85% of comScore's revenues are in the US, so only 15% is international. So if I looked at Google, if Google is 50/50, not that I'm predicting comScore is going to go to 50/50, but it would seem like comScore definitely has further to go internationally, given that most of the world's Internet users are not in the United States. And they do do that tracking internationally. It's just a question of scaling that business, when they open up international offices.

TWST: So they're well positioned for the longer term?

Mr. Helfstein: Correct.

TWST: And the other one you touched on was Move? What's the appeal there?

Mr. Helfstein: Move owns Realtor.com. They're the leading real estate Website by a significant factor. They've made a number of changes over the last two years to position the company much more aggressively from a content Website standpoint and they have an exclusive relationship with the National Association of Realtors (NAR), which basically gets them the best data. So really if you're a consumer and you're looking to buy a house, that's the place you go. They've got very strong relationships with agents and brokers around the country, and while all the listings are free, they then try to convince those agents and brokers to kind of upsell. They also have the leading CRM or client relationship management software for real estate brokers and agents, and I think there is an opportunity for them to tie that into the Website. So just like Google, you only pay, as in advertising, if somebody clicks, you can track the effectiveness, and I really believe there is an opportunity for that to happen over the longer term in the real estate sector with Move's Website. In the short term, are they feeling pain because of the real estate cycle? Of course, but in the most recent quarter, the core part of their business was down just a few percent, and that's pretty impressive, given what's going on.

TWST: Is there anybody else in that space or are they really the dominant players?

Mr. Helfstein: Publicly traded consumer focused, they're the only one. There is ZipRealty (NASDAQ:ZIPR), which we don't cover, but that's more of a real estate broker as opposed to a listings content business. And then the competitors Zillow and Trulia are private.

TWST: So it's about the only game in town?

Mr. Helfstein: Yes, it's the only game in town from that perspective. Like I said earlier, they've identified a significant cost savings moving into 2009. So no matter what happens, we see significant growth for them from a cash flow and an earnings standpoint, and we also expect to see some interesting creative things from them on the content side.