Citigroup analyst Mark Mahaney downgraded CNET (ticker: CNET) from Buy to Hold. Excerpts:
Full disclosure: at the time of writing, the editor of The Internet Stock Blog is short CNET.
CNET: Risk-Reward Less Compelling From Here
We are downgrading shares of CNET from Buy to Hold. CNET has moved within 5% of our revised $14 price target, so we see limited valuation upside to the shares from here.
When we initiated, the long thesis on CNET was: 1) Strong secular growth in Net advertising; 2) Broadening advertiser base; 3) Business model leverage; 4) Online category leadership; and 5) Potential acquisition candidate. Per our 7/26 earnings note, we believe June quarter fundamentals incrementally supported our long thesis. Post quarter data points have also been positive. The issue for us here is that we don't see near-term catalysts that would cause material estimates revisions.
We are maintaining our estimates; but we have increased the P/E/G and EV/EBITDA/G multiples for CNET to bring them in line with the sector average. Hence, our price target increases from $13 to $14.
We arrive at our $14 target price for CNET based on a combination of EV/EBITDA and P/E analysis. Our EV/EBITDA analysis generates a $14.51 price target, while our P/E analysis generates a $13.90 price target. Our $14 target rounds down the average of the two.
EV/EBITDA: We apply a 22X multiple to our 2006 EBITDA estimate of $100MM ($0.60 per share) to reach a $14.51 target price, adjusting for $84MM ($0.54 per share) in net cash and $519MM ($0.57 NPV per share) in NOLs. Our target multiple is largely driven off of growth assumptions, but we usually also consider historical multiple ranges, relative sector multiples, and intangibles like management’s execution track record. For context, we are modeling a 2007 EBITDA per share growth of 22%. We are also assuming 2006-2009 compound EBITDA per share growth of approximately 21%, so our target multiple is on par with the growth rate, and implies a 1.0X EV/EBITDA/G multiple. (Our 21% ’06-’09 growth outlook is based on revenue growth deceleration from 18% in 2006 to 10% by 2009 and EBITDA margin expansion from 24% in 2006 to 33% in 2009. Our out year revenue growth assumption may be overly conservative, but we believe it is reasonable.) Further, the 22X target multiple is lower than CNET’s current 2005 multiple, so we are conservatively assuming multiple contraction.
Our prior multiple was 20X. For our coverage Internet stocks, we have consistently used an EV/EBITDA/G multiple of 0.8X to 1.1X, with 1.0X or 1.1X being the preferred multiple for the strongest fundamentally driven stocks like EBAY, GOOG, and YHOO. We believe CNET’s June quarter fundamental trends place the stock in this category.
P/E: We apply a 42X multiple to our 2006 proforma EPS estimate of $0.32 to reach a $13.90 target price, adjusting for $519MM ($0.57 NPV per share) in NOLs. (Our proforma EPS estimate adds back non-cash amortization and one-time charges and applies a full 35% tax rate.) For context, we are modeling 2007 EPS growth of approximately 25%. We are also assuming 2006-2009 compound EPS growth of 25%, so our target multiple implies a 1.1 PEG. Further, the 42X target multiple is below CNET’s current 2005 multiple, so we are conservatively assuming multiple contraction. Our prior multiple was 39X. For our coverage Internet stocks, we have consistently used a PEG multiple of 1.6X to 1.8X, with 1.7X or 1.8X being the preferred multiple for the strongest fundamentally driven stocks like EBAY, GOOG, and YHOO. We believe CNET’s June quarter fundamental trends place the stock in this category, so we have increased the PEG from 1.6X to 1.7X.
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