Barclays Downgrades Yelp And Zillow, Prefers Undervalued Internet Stocks Instead

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In a report published Monday, Barclays analyst Christopher D. Merwin said that the SMID-cap Internet sector had been "increasingly volatile," with decelerating traffic growth and stiffening competition, particularly in local. Merwin believes that competitive pressures would not abate in the near term, as long as "VC funded startups are able to undercut larger players on price or outspend on marketing, without the scrutiny of public investors." "Heading into earnings, we favor lower multiple names that we believe are at the beginning (or in the midst) of a positive earnings revision cycle, rather than challenged stocks with ostensibly "cheap" multiples relative to consensus growth estimates that are probably too high," Merwin added. Barclays downgraded
Yelp IncYELP
from Overweight to Equal Weight, while reducing the price target from $36 to $50. Merwin believes that "the fundamental case" for Yelp had become "more challenged." Traffic growth slowed to 8 percent y/y in 1Q15, from 30 percent y/y in 1Q14. While Yelp intends to triple its investment in marketing this year to reaccelerate growth, we believe the cost of growth is now structurally higher, and should lower the margin potential for the business. While competition in the local space was rising, the business model of selling subscriptions to local businesses appeared to be "particularly vulnerable to churn at higher subscriber levels, which Yelp is now approaching," the report said. Merwin downgraded
Zillow Group IncZ
from Equal Weight to Underweight, while reducing the price target from $90 to $70. The company was witnessing slowing traffic growth, particularly in its Trulia brand. Merwin expects this slowdown to negatively impact revenue growth and "necessitate a higher level of marketing spend than consensus estimates would suggest." With competitors like Realtor.com achieving higher traffic than the Trulia brand, the 2016 estimates for Zillow could "likely move lower from here, particularly on EBITDA." The report added, "…we await a better entry point for Z shares." Barclays cited
IAC/InterActiveCorp
IACI
,
Activision Blizzard, Inc.ATVI
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and
Electronic Arts Inc.EA
as the top ideas in the sector.
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Posted In: Analyst ColorDowngradesPrice TargetAnalyst RatingsBarclays
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