Goldman Sachs analysts Heath Terry, Maria Seredina, and Mrinal Pareek published a report on December 14th. Goldman Sachs (NYSE:GS) is bullish on the internet penetration growth but many of the online advertisers are rated as neutral or have sell recommendations which is in contrast to the ecommerce business. We think this can create a good opportunity for investors to create a long/short portfolio within the internet space.
Here are the highlights of the companies in the Online Advertising sector, recommended by Goldman Sachs:
AOL (NYSE:AOL), an online Web services company, has a number of brands dealing with consumers, publishers, and advertisers. It has been given a neutral rating by Goldman Sachs. Huffington Post, Engadget, TMZ, and other websites are part of AOL’s advertising business and it generated 60% of its revenues through advertisements on such companies. AOL’s access business generates operating profit greater than 100%. Goldman Sachs says that it leverages its free cash flow by doing acquisitions or organic means (such as local news and community websites). Goldman Sachs expects online advertising to keep growing in coming years. Currently, its stock is trading at $14.13 and is expected to reach a target of $15. AOL’s market capitalization stands at $1.49 billion and has earnings per share of $0.51. Its P/E ratio is 27.66x while net margin stands at 1.4%. Goldman believes that an EV/EBITDA ratio of 3.5x is expected to be achieved in 2013, but that is still below the sector average of 9.2x.
comScore (NASDAQ:SCOR) helps customers develop digital business strategies by providing a digital marketing intelligence platform. Goldman Sachs has issued a sell rating to the company’s stock and we think investors can benefit by short selling the stock. Goldman Sachs thinks that with continued fragmentation in the internet usage among devices, comScore’s job is becoming quite tasking. It is getting harder to track usage statistics with the rise of the numerous ways of browsing the internet. comScore cannot fully rely on online advertising to raise revenue. Also, with the rise in privacy issues, many users and even web-browsers themselves delete cookies that comScore needs to track for information. Currently, its stock is trading at $18.38 per share and is expected to go south of $18. Market capitalization stands at $0.67 billion and the company has negative net margins of 5.9%. Debt constitutes 7.2% of total capital and EV/EBITDA of 10x is expected by 2013.
Demand Media (NYSE:DMD) uses an internet-based model for creating content at scale on a professional front. It has been given a neutral rating by Goldman Sachs. With the improvements in search by Google, Demand Media’s business is seeing a recovery as it is working more closely with Google to optimize search results based on merit. The company is currently trying to test its new evaluation methods and this process is likely to take some time to perfect. On the other hand, Goldman argues that a partnership with Youtube, expansion of its international footprint, and delivery of additional content monetization is helping the company achieve positive results. Currently, its stock is trading at $6.72 per share and is expected to reach $8 by the end of 2012. Market capitalization stands at approximately $0.7 billion and net margin is negative 4.7%. Goldman Sachs expects the company to achieve an EV/EBITDA of 6x by 2013, against the industry average of 9.2x
IAC/InterActiveCorp (IACI), an internet company that serves consumers in more than 30 countries, has been given a neutral-rating by Goldman Sachs. Match.com, Servicemagic, and Citysearch are owned by IAC. The company has signed a new agreement with Google, resulting in an increase in its toolbar distribution. Currently, Match is the strongest asset in IAC’s portfolio due to a rise in social networking, mobile internet usage, and international growth. Growth in the toolbar and other media business is expected to be slow. IAC’s shares are currently being traded at $41.02 and are expected to reach $49 by the end of 2012. Market capitalization stands at $4.05 billion and a net margin of 7.9% is observed. Debt accounts for 3.7% of total capital and the expected (Goldman expectations) EV/EBITDA for 2013 is 8x, versus the industry average of 9.2x.
LinkedIn (NYSE:LNKD) allows its member to create and share their professional identities online and has more than 135 million members in over 200 countries. It has been given a neutral rating by Goldman Sachs. Goldman says that LinkedIn is growing at over 50% year over year and has a combined opportunity of recruiting and advertising at more than $100 billion. With the continued growth in such activities, LinkedIn’s value is increasing and with added updates to its content, it can continue to see a rise in its value. Its current market price of $64.94 has fluctuated in the range of $55.98 to $122.70 over the last 52 weeks. The company has market capitalization of $7.13 billion and a net margin of 0.5%. Expected EV/EBITDA of 25x greatly exceeds the current industry average of 9.2x.
Pandora Media (NYSE:P), an internet radio based in the U.S., has been given a neutral rating by Goldman Sachs. With over 100 million registered users, Pandora generates revenue through audio, advertisings, and premium subscriptions. Goldman thinks that the expansion of distribution and an improvement in music selection is helping the company expand its user base. If the company penetrates the local advertising market through mobile phones, revenue per listener hour could increase substantially. Its stock is currently trading at $9.99 per share and is expected to go north of $12 by the end of next year. Market capitalization for Pandora stands at $1.88 billion and expected EV/EBITDA for 2013 is 84x versus the group average of 9.2x.
Goldman Sachs analyst has also mentioned Google in the report which is a hub for online advertising. The analyst didn’t discuss Google in detail and didn’t mention the rating, but we are bullish about Google. Here are few details about the stock.
Google (NASDAQ:GOOG) recently acquired Motorola Mobility, which is expected to greatly increase its market share. Its primary source of revenue is through online advertisement. Currently, shares of Google are being traded at $621.83 per share and they have stayed within the range of $473.02 and $642.96 over the last 52 weeks. Google has a market capitalization of $201.4 billion and earnings per share of $29.34. Its most recent net profit margin was 28.08% in September, 2011.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.