Investing

Expected Price Gains for Internet Stocks (GOOG, YHOO, AOL, BIDU, DMD, LNKD, MWW, RATE, TST)

As the internet has developed over the past 15 years or so, a variety of business models have appeared — and some have disappeared. Revenue models are also different, running from advertising to subscription to content provider types. The dominant revenue model is advertising and the leaders there are Yahoo! (NASDAQ: YHOO) in display advertising and Google (NASDAQ: GOOG). AOL (NYSE: AOL) and China’s Baidu (NASDAQ: BIDU) are other major ad driven sites.

LinkedIn (NASDAQ: LNKD) and Monster World Wide (NYSE: MWW) depend on subscriptions for revenue, while Demand Media (NYSE: DMD), Bankrate (NYSE: RATE) and TheStreet (NASDAQ: TST) provide original content surrounded by advertising. In addition to these publicly traded stocks, the internet space also includes social networking company Facebook, social game company Zynga and coupon site Groupon. The latter two have filed for IPOs and both are expected to come public as soon as next month. All the following financial data comes from Yahoo! Finance, unless noted otherwise.

Google has a median target price of $727.50 from 30 brokers. Shortly after noon today, shares are trading at $587.87, for an implied gain of $139.63, or 24%. Google’s forward P/E is 13.45 and the company does not pay a dividend. The stock’s 52-week trading range is $473.02 to 642.96, and at today’s price that is about 24% above its 52-week low, posted earlier this morning, and 9% below the 52-week high. Google reaps nearly $10 billion a quarter in advertising revenues. Only a relatively small portion of that is mobile advertising, but as Google’s best-selling Android mobile operating system continues to spread, the mobile ad revenue could continue its triple-digit growth rate for some time to come.

Yahoo! has a median target price of $18.00 from 23 brokers. Shortly after noon, shares are trading today at $16.33, for an implied gain of $1.67, or 10%. Yahoo!’s forward P/E is 18.55 and the company does not pay a dividend. The stock’s 52-week trading range is $11.09 to $18.84, and at today’s price that is about 47% above its 52-week low, posted earlier this morning, and 13% below the 52-week high. Yahoo! recently fired its CEO and is currently exploring strategic options. Much of the company’s value resides in its nearly 40% share in China’s Alibaba e-commerce site. The stock price is relatively high on the belief that the company will find a buyer willing to pay a premium.

AOL has a median target price of $17.00 from 15 brokers. Shortly after noon today, shares are trading at $14.38, for an implied gain of $2.62, or 18%. AOL’s forward P/E is 84.65 and the company does not pay a dividend. The stock’s 52-week trading range is $10.06 to $27.65, and at today’s price that is about 43% above its 52-week low, posted earlier this morning, and 48% below the 52-week high. AOL recently purchased the Huffington Post properties, which gave the company something of a boost. The high forward P/E speaks volumes about prospects for future earnings. AOL, like Yahoo!, probably is overpriced.

Baidu has a median target price of $191.00 from 26 brokers. Shortly after noon, shares are trading today at $127.89, for an implied gain of $63.11, or 49%. Baidu’s forward P/E is 29.11 and the company does not pay a dividend. The stock’s 52-week trading range is $94.33 to $165.96, and at today’s price that is about 36% above its 52-week low, posted earlier this morning, and 23% below the 52-week high. Baidu’s great advantage is that it is the largest and fastest growing internet company in the world’s most populous country. Sheer numbers are on Baidu’s side for now and for several years to come. The forward P/E may indicate an overpriced stock, but its stock price is still nearly $35 per share below its target price. There’s plenty of room for this one to run.

Demand Media has a median target price of $15.00 from 10 brokers. Shortly after noon today, shares are trading at $6.47, for an implied gain of $8.53, or 132%. Demand Media’s forward P/E is 16.97 and the company does not pay a dividend. The stock’s 52-week trading range is $5.24 to $27.38, and at today’s price that is about 23% above its 52-week low, posted earlier this morning, and 76% below the 52-week high. Demand Media was hit hard by a change earlier this year to Google’s search algorithm and the company has not recovered. The target price here is too high, and the company continues its arguable accounting practice of capitalizing content creation costs and amortizing them over five years. The effect of that practice is to spread costs over a long period, making the company look more profitable than it may be.