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 the internet industry as “attractive.” We will discuss Morgan Stanley’s recommendations in a series of three articles. This is the second of the three.
Google (GOOG) has been given an equal-weight rating by Morgan Stanley with a price target of $672. October witnessed a 16% y/y rise in time spent online by a US consumer, while worldwide consumer spent 15% more time. In the US and worldwide, internet usage for search during the same period increased by 28% and 24% y/y, respectively. Google is expected to remain a key beneficiary of increasing global online search activity, given its dominance in the search advertising business, display advertising initiatives and major market share in Mobile.
Given the company’s track record, Google may generate new opportunities in both desktop and mobile segment (where it already has a strong position) as well as in the core business side and social networking. Given current valuations, its shares represent limited downside risk. Ad quality initiatives and traction in social with Google Plus remains potential catalysts for the company.
Moreover, aggressive adoption of Android by smart phones is expected to provide additional growth to the company. Currently, Android represents 53% of global smart-phone sales, and its share has doubled during the last year. However, primary risks for the company includes its investments in new initiatives driving company’s margins on the lower side, while net revenue from new businesses at the same time may underperform expectations. Stephen Mandel’s Lone Pine Capital had nearly $500 million invested in GOOG at the end of the third quarter.
Groupon.com (GRPN) has been given an equal-weight rating by Morgan Stanley with a fair value of $27. The idea of self service or automated deals is more cost-effective but has failed in the past as merchants usually are unable to provide high-quality deals to their customers. Recently, Facebook, Yelp and OpenTable (OPEN) also attempted to explore this area but later all exited or scaled down their operations. MS thinks that making this idea work for Groupon would remain a challenging task. The company also offers Now! deals, that have relatively high take rates but much lower ASP. Groupon is also well positioned to leverage Social 2.0 to a great extent, given it enables users to "like” and tweet about their favorite deals. MS analysts believe that the company will grow its business in a valuable and less expensive way through a multiplier effect created by its existing subscriber base.
HomeAway (AWAY) has been given an overweight rating by Morgan Stanley with a price target of $44. MS analyst expects the company to invest in traveler awareness program and integrate its payments platform onto its web domains. Shift of advertising and marketing by the homeowners from offline to online continue to benefit the company. The company has made significant investments into a broad-based technology platform and has acquired a number of smaller competitors. On the mobile front, HomeAway has developed apps for both Android and iOS that allow travelers to search and browse listings. However, the company has not yet integrated its payments systems to the mobile platform, which is anticipated to be done by 2012 end. The company has huge potential to benefit from social integration, which can make marketing highly effective and actively improve the user experience.
LinkedIn (LNKD) has been given an overweight rating by Morgan Stanley with Price target of $100. LinkedIn has revolutionized the talent acquisition industry by effectively connecting HR personnel to the potential hires. The company has a number of organizations, of all sizes, on board. LinkedIn recently launched mobile app for iOS and Android smart phones, and the mobile browser site was revamped using HTML5 technology. LinkedIn penetrated rapidly through mobile service that grew by +400% y/y in CQ3. On the social side LinkedIn offers customizable homepage that sorts and delivers the most relevant information to the user.
Netflix (NFLX) has been given an equal-weight rating by the Morgan Stanley with a fair value of $90. Company is all-set for growth in 2012. For their international expansion, the company will boost content spending at all time highs of~$2.5B. MS analyst believes that the company’s strategy of partnering with consumer electronics devices is expected to benefit the company in 2012. This strategy will make Netflix content viewing experience routine but difficult to replicate. Potential also exists in the mobile segment, but it is not expected to be a key driver of growth. Netflix has also adopted social integration through Facebook, however, the US would remain excluded due to privacy laws.
OpenTable (OPEN) has been given an equal-weight rating by Morgan Stanley with fair value of $55. Analyst expects OpenTable to successfully and gradually replace the offline methods of reservation bookings. MS thinks that North America subscription revenue per restaurant in 2012 is expected to decline slightly but this will not affect traffic to the restaurants’ websites, as optionality associated with online search would continue to dominate. On the international front challenges exists with respect to competitive dynamics in Germany and adoption rates in Japan, while synergies in UK will start to emerge with the integration of Top table and the transition to ERB. OpenTable has developed mobile apps for all major operating systems in order to capture smart phone users who make reservations on instant basis. The company has not done much to socially integrate its users, however there is a lot of scope in this area, where sharing of social reviews about restaurants can benefit the entire marketplace.
Pandora Media (P) has been given an Overweight rating by Morgan Stanley with a Price target of $16. Pandora is a leading Internet radio service in the US, ranked amongst the top 20 stations, with ~66% share of average active sessions online. Although company’s overall share in radio listening is much lower at ~4.3%, but its consistent triple-digit growth in listener hours gives its sales team bargaining power against advertisers. By delivering music on the mobile Internet Pandora has become one of the biggest mobile plays in the sector. Pandora’s mobile devices integrate with smart phones, consumer electronics products, and automobiles. The company has also upgraded its desktop platform in order to strengthen its social integration, in addition to its existing Facebook connectivity. Crosslink Capital had nearly $500 million invested in P at the end of September.