CNN Money
New Internet bubble? Not so fast
By _Paul R. La Monica_ (http://buzz.money.cnn.com/author/isles73/)
January 3, 2013
The opinions expressed in this commentary are solely those of Paul R. La
Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories
and AbbVie, La Monica does not own positions in any individual stocks.
Call them the dot-com survivors.
AOL _(AOL)_ (http://money.cnn.com/quote/quote.html?symb=AOL) , Amazon.com
_(AMZN)_ (http://money.cnn.com/quote/quote.html?symb=AMZN) , eBay _(EBAY)_
(http://money.cnn.com/quote/quote.html?symb=EBAY) , Priceline _(PCLN)_
(http://money.cnn.com/quote/quote.html?symb=PCLN) and Yahoo _(YHOO)_
(http://money.cnn.com/quote/quote.html?symb=YHOO) were all major players at
the height
of Internet insanity in the late 1990s. They are all still around today --
and their stock prices are soaring again, bringing back some uncomfortable
memories of the bursting of the tech bubble in 2000.
Shares of these five companies gained an average of 59% in 2012. AOL more
than doubled while Yahoo was the laggard of the group with a mere 23% jump.
But this may not be a sign of another imminent collapse for dot-coms and
other tech stocks.
For one, all of these companies are profitable and all but one are trading
at reasonable valuations. Priceline and Yahoo trade for about 17 times 2013
earnings forecasts while eBay and AOL are each valued at around 20 times
estimated profits for this year.
The one exception? Amazon. It is trading at nearly 150 times 2013 earnings
estimates. But more about that later. First, let's look more closely at the
other four dot-coms.
_Related: Priceline falling over fiscal cliff?_
(http://buzz.money.cnn.com/2012/12/10/priceline-stock-2/)
Priceline continues to dominate the online travel sector. 2012 was a
volatile year for the company, as investors worried about how the debt crisis
in
Europe would impact the company, whose Booking.com subsidiary has a
sizable presence in Europe.
But, with earnings expected to increase by a 20% clip annually, on average,
for the next few years, the stock still looks attractive. Priceline also
stands to benefit from its purchase of travel search site Kayak _(KYAK)_
(http://money.cnn.com/quote/quote.html?symb=KYAK) . That deal should close
later this year.
_Related: Vote for Marissa. Yahoo is cool again_
(http://buzz.money.cnn.com/2012/11/06/yahoo-marissa-mayer-stock/)
Yahoo's valuation may be similar to Priceline's. But the stock looks to be
a much riskier bet. New CEO Marissa Mayer has brought a palpable sense of
excitement but the jury is still out as to whether Mayer's turnaround plan
for the online media company will work any better than any of her numerous
failed predecessors.
Investors clearly think that the ex-Google _(GOOG)_
(http://money.cnn.com/quote/quote.html?symb=GOOG) executive is the right
person for the job.
Shares of Yahoo closed above $20 on Wednesday. The last time that happened was
way back in the financial crisis days of September 2008. Still, it's going
to take time for Mayer to right the purple ship. Earnings and revenues are
expected to be flat in 2013. This stock may have gone up a bit too much on
hype for now.
_Related: eBay: Buy, buy, buy_
(http://buzz.money.cnn.com/2012/10/18/ebay-stock-2/)
eBay is a fundamentally different company now than it was back in the late
1990s. Sure, it's still an online auction powerhouse. But there's much more
to eBay than Pez dispensers. The company's PayPal unit is the clear star
now. Revenue from eBay's payments segment rose by 22% in the third quarter
versus a year ago. By way of comparison, sales from eBay's marketplaces
business gained 10%.
If sales keep growing at such a robust pace, it may not be long before the
payments business is bigger than the marketplaces unit. Thanks to this
focus on payments, eBay's earnings are expected to increase 14% a year for the
next few years. That's impressive. But investors may have to be a little
wary with shares trading at their highest levels in eight years. Competition
from Square and Facebook _(FB)_
(http://money.cnn.com/quote/quote.html?symb=FB) in the burgeoning mobile
payment market could put a dent in PayPal's
growth.
_Related: AOL soars on third-quarter earnings report_
(http://buzz.money.cnn.com/2012/11/06/aol-stock-earnings/)
AOL is sort of what Yahoo hopes to become. AOL, which was spun off from
CNNMoney parent Time Warner _(TWX)_
(http://money.cnn.com/quote/quote.html?symb=TWX) in 2009 after the disastrous
AOL-Time Warner merger of 2001, has
enjoyed new life as a smaller, independent firm focusing on content and
advertising. The owner of The Huffington Post and the Patch network of local
sites may have finally turned a significant quarter in the third quarter of
2012 when it posted its best sales performance in seven years.
Of course, there's much more work to be done. AOL reported that
third-quarter revenues were flat from a year ago. The job that CEO Tim
Armstrong (also
a former Googler) has done to steer AOL more toward advertising and away
from the dinosaur business model of subscriptions for Internet access is
commendable. But AOL has to finally begin showing legitimate revenue growth
... and the expectations for AOL are once again high. When your shares more
than double in a year, you could have a lot of room to fall if you
disappoint.
_Related: What Wall Street really thinks of Amazon_
(http://tech.fortune.cnn.com/2012/12/19/what-wall-street-really-thinks-of-amazon/)
Now let's look at Amazon. Interestingly, Amazon is the only company in this
Internet Gang of Five that still has the same CEO now as it did back in
the late 1990s. That helps to partly explain why Amazon trades at such a
substantial premium to other Internet stocks.
Investors clearly are confident that Jeff Bezos will be able to continue
steering Amazon in the right direction. The stock often appears to be
prohibitively expensive because Bezos is willing to sacrifice short-term
profits
by investing in growth opportunities, such as acquisitions, or services like
its cloud hosting business and Amazon Prime shipping. Bezos has earned the
benefit of the doubt.
That said, the stock still may be a little too frothy. Even if you look at
Amazon on a price-t0-sales basis -- a metric often used for brick and
mortar retailers -- shares are substantially more expensive than Wal-Mart
_(WMT)_ (http://money.cnn.com/quote/quote.html?symb=WMT) and Target _(TGT)_
(http://money.cnn.com/quote/quote.html?symb=TGT) . Amazon trades at nearly 1.5
times estimated 2013 revenues. The market caps for both Wal-Mart and Target
are about half of their 2013 revenue forecasts.
And there's the irony. Amazon's stock may be the most bubbleicious of all
the dot-coms. But the company is arguably stronger than its ever been and
the best run Internet company out there.
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