Morgan Stanley Research Analyst – Scott Devitt and his team, published a report titled “Internet; 2012 Outlook: Worlds Collide” on Dec 14, 2011. Morgan Stanley views internet industry as “attractive.” We will discuss Morgan Stanley’s recommendations in a series of three articles. This is the first of the three.
Amazon.com (AMZN) has been given an Overweight rating by Morgan Stanley with a price target of $260. MS expects Amazon to grow by more than 10% in 2011 and 15% in 2012. Amazon’s long-term story seems very promising with increasing market share in eCommerce. By investing resources in SKU optimization, Amazon has been able to keep just enough inventory to satisfy demand and hence, is managing its working capital effectively. The company’s merchandise vendors have been funding its growth and boosting its ROIC, as the company does not have to plow back excess operating margin into the business. On the social front Amazon has not yet fully integrated itself with Social 2.0 and also lacks broad scale ties with Facebook.
Ancestry.com (ACOM) has been given an Equal-weight rating by Morgan Stanley with a fair value of $28. Ancestry has the largest library of digital genealogy records, and currently has over 1.7M subscribers, spanning over 28 million family trees since inception. This creates high barriers to entry. Ancestry generates a monthly internet traffic that is 4 times the traffic of its combined competitors. ACOM recently released an iOS app for the iPhone and iPad, which is expected to induce an increased level of casual user activity. ACOM allows its subscriber to connect and collaborate with other Ancestry users who may be looking for common relatives – something impossible to do before. ACOM has also integrated itself with Facebook in order to help users search for relatives via Facebook.
Blue Nile (NILE) has been given an Equal-weight rating by Morgan Stanley with a fair value of $47. Blue Nile had a tough last year when rising costs of diamond and precious metals made growth difficult. Historically the company has witnessed a transition from engagement sales into diversified fashion jewelry. Its Jewelry segment generates enough margin to work profitably as an eCommerce, but at the same time it is difficult to gain customer awareness and brand equity without fancy stores. Going forward mobile and social media campaigns will help generate more sales.
Demand Media (DMD) has been given an Equal-weight rating by Morgan Stanley with a fair value of $10. Demand Media is the 18th largest US internet property with around 60MM unique users. The company operates a collection of online media sites such as eHow.com, Livestrong.com and Cracked.com. Demand Media focuses on creating long-lived internet content that would likely generate revenue over a long period of time. The company has been facing issues with regard to the quality of its content. Management has recently taken initiatives to improve the quality and plans to reduce new text articles by 50% in 2012. Morgan Stanley has raised DCF hurdle rate to reflect increased risk as the company transitions to a fewer unit, higher quality and higher cost content model. As a result DCF based fair value has been revised downward to $10 from $12. Its shares are trading at 11x 2012E EBITDA and at 26x adjusted earnings.
Digital River (DRIV) has been given an Under-weight rating by Morgan Stanley with a price target of $18. The company currently benefits from offline-to-online shift in software, consumer electronics and gaming purchases. However, it faces challenges in its direct-supplier distribution platforms where there is a shift from software delivery model to browser and mobile-based app stores. As a result, Digital River’s business (excluding revenue from Microsoft) is expected to grow by only 7% y/y in 2012, which is half of global eCommerce growth. The company has limited presence in the mobile and tablet app market. Research in Motion (RIMM), the only mobile company to outsource eCommerce hosting capabilities to Digital River, is losing market share in the mobile phone market. Digital River needs to focus on forming partnerships and take advantage of its client base to increase its participation in mobile and tablet market; otherwise its platforms would continue to lose relevance.
eBay (EBAY) has been given an Over-weight rating by Morgan Stanley with Price target of $40. The company had a lot of achievements during 2011. It started acquiring and developing portfolio of mobile solutions through the acquisition of Milo and Red Laser in order to find local products. The company estimates mobile GMV to be ~$5B in 2011, twice to that in 2010. Its new platform, X.Commerce is the first open development platform that aims to engage merchants and consumers. The company has built partnership with Facebook "social design" to allow X.commerce developers to integrate Facebook in order to generate word-of-mouth marketing.
Expedia (EXPE) has been given an Under-weight rating by Morgan Stanley with a Price target of $25. The US online travel market’s penetration is approaching 40%, becoming one of the mature segments of eCommerce. MS believes Priceline (PCLN) to be a strong competitor of Expedia due to its lower take rate agency hotel business. As a result analysts expect Expedia’s US online travel market share to decline from 16.9% in 2010, to 16.3% in 2013. MS says that after acquiring Mobiata, Expedia is now well positioned in the mobile travel space, and expects its mobile traffic to increase from a mid single-digit growth to a low double-digit, in 2012. Moreover, Expedia is more aggressive on using social media as a promotional and distribution channel compared with its peers. Expedia has been successful in creating brand awareness and driving conversion from social media networks like Facebook.