Sanford Bernstein’s Carlos Kirjner, formerly of the Federal Communications Commission, today kicked off coverage of Internet stocks, placing Outperform ratings on Amazon.com (AMZN) and Google (GOOG), and Market Perform ratings on eBay (EBAY), Netflix (NFLX), and Yahoo! (YHOO).
Kirjner’s theme in this 109-page opus is the “transformation of retail, media, and payments,” by which he means the constant specter of “creative destruction” that hangs over the Internet.
Kirjner prefers Amazon and Google as two companies with “sustainable competitive advantages and strong growth potential.”
Google’s keyword search business is likely to grow faster than people realize, and for a longer period of time than they appreciate, Kirjner writes. He assigns the stock a $743 price target, and he’s estimating 2011 EPS of $30.66 and 2012 EPS of $41.06, which is lower than the consensus $36.86 for this year but ahead of next year’s $43.86 non-GAAP consensus.
Amazon is going to grow faster than overall e-commerce because it has things such as “Prime,” its membership benefits program that includes free shipping, its digital media strategy with the Kindle, and its Amazon Web Services cloud computing offering. Kirjner is modeling net sales of $50.1 billion this year and $67.2 billion next year, and EPS of $2.69 per share in 2012. Analysts have been modeling $48.73 billion in revenue this year, $64.78 billion next year, and EPS of $2.07 a share. Kirjner’s price target is $271.
People are over-estimating the U.S. market opportunity for Netflix, as the number of homes “penetrated” by the service that are “addressable” by the service is higher than people think. The domestic market is saturated, in other words. The expansion of Netflix’s streaming operations to Latin America is limited by “low income and poor infrastructure” in that market. Competition in Europe, and the prospect of “capped” broadband usage could limit expansion in that geography, he thinks. Kirjner has a $79 price target on NFLX.
Yahoo’s stock is currently enjoying a buyout premium that puts the stock at about fair value, in his view. The Asian asssets (Ablibaba, Yahoo! Japan) are worth perhaps $12 a share, while the “core business” is worth $8 a share. Although Yahoo! may beat consensus revenue and earnings estimates next year, it won’t do so by enough of a margin to justify buying the stock, he thinks.
Lastly, Kirjner maintains eBay at a $37 price target. Growth is likely to fall below that of e-commerce overall, and especially trail that of Amazon. The shift of eBay’s gross merchandise value to large sellers is reducing eBay’s take rate, he writes. On the other hand, PayPal‘s payment volume will continue to grow faster than e-commerce, though a revamped “Google Checkout” may dampen PayPal’s take rate.
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