Internet Stocks are back in fashion. Be it the new age Web2.0 stocks like Facebook (NASDAQ:FB) or the old portals like AOL (NYSE:AOL), Yahoo (NASDAQ:YHOO) etc., they are all in news for one reason or another. AOL's stock price has gained 165% in the current year while Facebook's stock is bottoming around half of its IPO price with Mark Zuckerberg allaying investors concerns on long term impact of increasing mobile usages. Yahoo is also grabbing investor attention after Marissa Mayer took over as its new CEO. I thought it will be interesting to screen internet stocks for ideas which are worth going long on and the ones which one should avoid. The following is a list of four internet stocks with good EPS growth rates (>20%) which I believe makes a good buy:
Current Year EPS
Next Year EPS
Baidu.com, Inc. (NASDAQ:BIDU)
Yandex NV (NASDAQ:YNDX)
Groupon Inc (NASDAQ:GRPN)
Source: Consensus Estimates from Yahoo Finance
Here's a look at these stocks in detail.
Baidu and Yandex are leading search engine in China and Russia, respectively. I believe both these companies have significant growth potential ahead. Both China and Russia are several years behind US when it comes to online advertisement to GDP ratio. These companies, being the market leader in these markets, will be the natural beneficiaries as normalization occurs. In addition, GDP growth rates in Russia and China continues to remain high in comparison with the developed world. Although these companies have seen some moderation in growth due to macro economic issues, I believe investors should use this opportunity build position in these stocks. The current correction in prices of these stocks is somewhat similar to what happened to Baidu in 2008-09. Baidu's stock price corrected from $36 in mid 2008 to $11 by early 2009 because of slowdown in growth due to recession. However, once the economy picked up the stock price rose to over $150 by 2011 significantly surpassing previous peak levels. I won't be surprised if the history repeats again and both Baidu and Yandex see good upside once the broader macros improve. Both these stocks are trading at PEG ratio of less than one which is another sign that they are undervalued and makes a good buy.
Facebook has seen significant correction post IPO. The biggest reason for this correction was concerns regarding monetization of mobile users. However, Mark Zuckerberg recently commented at a Techcrunch conference that mobile will be a positive for Facebook in the long term and the company will make more money from mobile than desktop. If we go by Facebook's latest quarter earnings that might indeed be the case. According to Techcrunch, 14% of Facebook's Q3 Ad revenues came from mobile which clearly is a big leap from the last quarter. In addition to improving prospects in mobile, there are a lot of other positives for Facebook. The biggest one is its likely launch of Adsense like network which will open a new stream of revenues. I believe Facebook is still in early phase when it comes to monetizing its user base. The company is likely to continue growing for next several years and I believe investors should use post IPO correction to buy the stock.
Groupon has always been under severe criticism since it filed for IPO. To begin with there were a series of posts (see here, here and here) on Techcrunch which focused on how company's high commission structure is hurting small businesses. Then there were issues regarding the company's questionable accounting practices. However, despite of all these controversies, Groupon's business fundamentals continues to improve. The company posted profits for the first time this year and its EPS is likely to double going into the next year. At forward PE of just 10.74x and leadership position in daily deals segment, I believe stock offers good risk adjusted returns.
One internet stock which has corrected significantly after its IPO but still appears risky is Zynga (NASDAQ:ZNGA). Zynga's fundamentals are in a mess. Its high cash generating games like Farmville are on a decline and it is not able to launch any successful new games which can help it arrest this decline. In addition, it is involved in various copyright infringement suits which can lead to it taking high charges. In the last quarter the company posted decline in every important metrics - be it Daily Active Users, Average Mobile Update Players or Online Game Bookings. Although the company's valuation is inching towards its cash levels, I doubt if it will provide a good support level to the stock. The company is likely to turn unprofitable given declining revenue trajectory and hence we can see a good amount of cash burn going forward.
To sum up, Yandex, Baidu, Facebook and Groupon offers good growth prospects and are available at reasonable valuations making them a good buy. On the other hand, Zynga's declining fundamentals makes me skeptical about the company's prospects and I would recommend avoiding it.