Investors typically have to pay up to get higher returns from fast-growing Internet stocks. However, you can find some online outfits that aren't outrageously expensive.
"We're recommending names that historically wouldn't be perceived as value investments," says Scott Kessler, group head of information-technology stocks at Standard & Poor's Equity Research and analyst of stocks in the Internet software and services and Internet retailing subindustries. "A lot of people have a hard time appreciating that there could be significant value in Internet stocks. But I think at this point, that is the case," he adds.
Audible (ADBL), IAC/InterActiveCorp (IACI), RealNetworks (RNWK), and VeriSign (VRSN) are the stocks that have caught Kessler's eye. "They're all Internet companies, they're all profitable, have strong balance sheets, and have leadership positions," he says.
Kessler, who keeps a close eye on valuations, recently spoke with BW Online's Karyn McCormack about why he likes these stocks. Edited excerpts from Kessler's remarks follow:
Note: Scott Kessler is an S&P Equity Research analyst. He has no ownership interest in or affiliation with any of the companies on which he writes research. All of the views expressed here accurately reflect the analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed.
The stock trades at about $13 a share. This company is ramping in terms of profitability very quickly (See BW Online, 11/29/05, "Info Tech Stocks Worth Downloading"). We expect modest profits this year. Our estimate is 7 cents per share in profitability this year and 36 cents next year -- that's not a result of any one-time gain. Essentially, we're looking for EPS to quintuple.
Obviously, we're talking about a move off a low base, but the company is growing very significantly. They have substantial opportunities, including podcasting. This stock was in the high $20s earlier this year. It has bounced a little bit, and now it's in the low teens. This is a stock that we continue to like, and we think there's significant upside potential and the value is pretty attractive right now.
We recently upgraded IAC/InterActiveCorp. It has really been a difficult company for people to understand over the last couple of years. For one, IAC owns a number of disparate e-commerce and content businesses. They own everything from Evite to Home Shopping Network to Lending Tree to Ticketmaster. I think people have had a hard time understanding what the company is all about because it has so many different brands and businesses.
The second reason why the company has been perhaps underappreciated is because it has been buying and selling a number of businesses as well. This summer, it spun off Expedia (EXPE) and its related travel assets, and earlier this year, it bought Ask Jeeves. Both of those were pretty substantial transactions and could have caused some confusion among investors.
But we think a lot of that complexity and uncertainty aren't as pervasive as they once were. We think the company is focused on executing on its existing businesses. It has a nice stable of well-known brands and businesses.
We look at the stock as pretty notably undervalued, especially considering the strength of the company's balance sheet. The stock is trading in the high $20s, and we're looking for it to get to mid-$30s. Our 12-month target price is $34. This is a company we like. Historically people may not have considered this kind of company an attractive value, but we think it is.
This is another name we upgraded recently. RealNetworks is one of the foremost purveyors of online media services. Real Networks is right alongside Microsoft (MSFT) and Macromedia (MACR) for having the applications that are most commonly found on people's desktops, with the RealPlayer. A couple of years ago, their business was all about the RealPlayer. They've really evolved as a company, so that now, the primary drivers of growth for RealNetworks consist of online music and games services.
I understand that online music is a competitive business, and it's hard to make money in it. But recently, Yahoo! (YHOO) raised its music-service pricing and Microsoft started to promote Real's service. Real is the leader in online music subscription services and also a leading player in online games. Real is focused on the casual gaming area -- which is less competitive than MMORPGs -- massively multiplayer online role-playing games.
RealNetworks recently settled an antitrust suit with Microsoft. Real got a $761 million settlement. The company has a market cap $1.5 billion, so that's a substantial settlement. We're looking for the company to earn $1 a share in 2006 -- and the stock is trading under $9 a share. We think the shares are pretty attractive right now.
The company has changed a lot since the Internet bubble. It's still managing domain-name registrations. That's a very good business. But what they've been doing over the last couple of years is Internet security. It's also in managed security services.
Over the past couple of years, it also made a number of acquisitions in telecommunications -- most recently around next-generation mobile-content services.
The stock was hit a month or two ago -- largely because of concerns in the mobile-content businesses. We believe these issues have stabilized, and we also believe the other businesses are tracking well. We're looking for VeriSign to earn $1.24 next year. Its stock trades around $22 to $23, and the company has a growth rate in the mid-teens.