Why Internet Stocks Are Getting Too Pricey, in Three Charts
November 12, 2013 Leave a comment
Nov 11, 2013
Why Internet Stocks Are Getting Too Pricey, in Three Charts
Internet stocks have gotten too pricey for Morgan Stanley‘sMS +2.21% liking. The investment firm on Monday lowered its view on Internet stocks to “in-line” from “attractive” amid valuation concerns. Morgan Stanley also eliminated GoogleGOOG -0.54% from its “Best Idea” list, although the firm kept its buy rating on the search giant. The call comes as Internet stocks have rallied sharply this year. Google topped $1,000 a share last month, Facebook Inc.FB -2.80% rebounded over the summer and currently trades well above its $38-a-share IPO price and Netflix Inc.NFLX +0.90% is up 262% this year, the second-best performing stock in the S&P 500.Twitter Inc.TWTR +3.00% went public last week and boasted a 73% pop in its trading debut, although shares slumped on Friday and are down again on Monday,
The Internet stocks that Morgan Stanley covers have risen 57% this year, compared to the 28% rally for the tech-heavy Nasdaq Composite.
“Outperformance has been driven by multiple expansion rather than positive estimate revisions,” Morgan Stanley analyst Scott Devitt wrote in a note to clients. “Consequently, we believe current valuations could be full despite strong secular trends.”
The sector either is “fully-valued, or that consensus growth expectations are too low,” Mr. Devitt said. “We believe that growth needs to accelerate to justify recent performance, the absence of which could lead the group multiple to revert to the mean.”
In the chart below, Mr. Devitt points to how several individual stocks have broadly outperformed relative to fiscal 2013 EBITDA estimates.
In the second chart, he notes the sector’s valuation has hovered above its mean dating back to at least January 2006, making it more susceptible of a short-term pullback.
“Multiple expansion at current levels…presents a more balanced risk-reward with reversions to the mean possible, absent a meaningful acceleration of growth estimates,” Mr. Devitt says.
And in the his final chart, Mr. Devitt says the trajectory of the Internet sector’s revenue multiple is approaching 2007 highs, another reason to be cautious for the near-term.
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