3 Internet Companies To Buy For 2012, 4 To Avoid

by: The Analyst Hub

Due to recent macro uncertainty a lot of quality internet companies have corrected to the attractive levels. While some of them have a robust business model and provides attractive buying opportunities, others are still too overvalued or have significantly risks in their businesses making them a good sell instead. The following is a list of three internet companies to buy and four to sell going into 2012.

Three to Buy

Google Inc. (NASDAQ:GOOG)

Google is the world's #1 search engine and online advertising company. Google is a defensive stock with high growth rate. The company's leadership position in its core search business is what makes it a defensive stock. Its main competitors, Bing and Yahoo Search, have been unable to pose any meaningful threat to Google-- despite burning a good amount of cash. From a growth perspective, Google is likely to post a double digit growth rate for the next several years as a secular shift of advertisers from traditional media to online media continues. Its mobile business is likely to be another major growth driver.

Many of Google's web properties are undermonetized. For example, only 3% of YouTube videos are monetized through video advertising. This can increase significantly going forward. I see big potential from the recent announcement by Google that it will be launching 100 online video channels on YouTube that feature new original programming from celebrities such as Jay-Z, Madonna, Shaquille O'Neal and Tony Hawk.

This venture will generate ~25 hours of new, on-demand, original content per channel per day, and Google is reportedly paying up more than $100 million in advance to its content partners. I believe this and similar partnerships can potentially have a very big impact in the long run, as more and more original content comes online through these partnerships. Quality content is likely to bring in more advertisers, and thus help in further monetization of Google's properties.

Google is trading at a forward PE of just 14x, despite the expected 20% top and bottomline growth next year. Although some investors are worried about increasing dominance of Facebook, I think it's too premature to say that Facebook can adversely affect Google's core search and advertising business. I find the risk-reward profile of Google very attractive at these levels.


Yandex and Baidu are search engine leaders in their respective countries. Yandex is Russia's largest internet search company and has 65% traffic share and 70% revenue share. The company has an established track record of profitable expansion. I don't think the stock is expensive at 24x forward earnings when its EPS is expected to grow over 40% YoY for next several years. Baidu appears equally good Chinese story with 26x forward PE and expected EPS growth of 50%. Both Russia and China are 5-8 years behind US when we compare total online advertising spend to GDP. Thus, there is a secular tailwind for leading search companies in these markets as the normalization occurs. These companies are like to continue posting high EPS growth for next several years and it make sense to buy these growth stories after recent correction.

Four to Avoid

Netflix Inc. (NASDAQ:NFLX)

Netflix, Inc. is an Internet subscription service streaming television shows and movies. The company reported very lackluster Q3 results in October and gave a grim future outlook. The company lost 800,000 domestic subscribers last quarter. Although it was expected that the company would lose subscribers due to its subscription plan changes, the extent came as a surprise to many.

The stock price of Netflix has corrected significantly in the last few months. However, I see a further downside given the declining fundamental trend and significant erosion in goodwill among customers. Further, there are not many tangible assets on the balance sheet, and the company has $3.5 billion of off-balance-sheet debt. This can make things worse if the trend doesn't change in the near term.

Amazon.com Inc (NASDAQ:AMZN)

Amazon is the world's #1 online retailer. According to sell side consensus, Amazon's EPS estimates for the next year is $2.01. At a current price of $176, Amazon is trading at a PE of ~88x. I understand the growth story, but investing in such a high PE company in the current uncertain environment means taking disproportionate risks. Hence, I recommend avoiding this one.

MakeMyTrip Limited (NASDAQ:MMYT)

I believe the market is overly optimistic about MakeMyTrip's growth prospects. The main bull argument for the stock is increased internet penetration in India due to 3G rollouts, which will be a tailwind for MakeMyTrip. However, India's slowing growth and rising fuel prices are adversely affecting the aviation sector, which is MakeMyTrip's major end market. I see a potential slowdown in MakeMyTrip's growth going forward.

Groupon Inc (NASDAQ:GRPN)

Groupon is facing stiff competition and burning significant amounts of cash. The business has relatively low barriers to entry, and at a market cap of $14 billion, investors are clearly pricing in too many positive expectations for a company that is hardly making any profits.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.