Are Internet stocks immune to
recession? Well, no, silly, of course not. Funeral parlors are
recession resistant. E-tailers and advertising-dependent Internet
Citigroup’s Mark Mahaney Friday morning set out to recession test the major Internet stocks. He used four screens to conduct his analysis:
- International exposure.
- Counter-cyclical hedges.
- Least risk to 2008 Street estimates.
- Intrinsic valuation.
As noted in my last post, one conclusion he reached was that it is time to buy Priceline (PCLN).
In terms of international exposure - in other words, those with the lowest exposure to the U.S. economy - he lists Amazon (NASDAQ:AMZN), eBay (NASDAQ:EBAY) and Google, all of which generate close to half of their revenue from outside the country. Expedia and IAC-Interative (IACI) fair worst in this category.
In terms of country-cyclical hedges, he says Expedia, eBay, Google and Priceline score highest. Expedia and Priceline, he says, will get better inventory of hotel rooms and flights in a downturn. For eBay, he says, the advantage is their ability to “provide sellers with material liquidity in times of softness.” Google’s advantage, he says, is that search advertising is likely the last place to cut in an ad slowdown. Most exposed to a weak economy: Monster.com (NASDAQ:MNST) and IAC’s Lending Tree segment.
In terms of ‘08 earnings risk, he concedes that “there is clearly increased risk” to estimates for every stock in the Internet sector in the event of a recession. But he sees the least risk in Priceline, Google, eBay and Expedia.
In terms of valuation - which he looks at iin terms of free cash flow yield - he finds Expedia, IAC and Monster screen highest.
So - a drum roll, please - Mahaney says the least defensive stocks - i.e., those most vulnerable in a downturn - are Yahoo (YHOO) and IAC-Interactive (IACI). Mahaney maintains a Buy rating on Yahoo despite his concerns about its recession risk; he says the company has two major strategic options available, including outsourcing search to Google, or making a strategic acquisition.