January Roundup For Internet Companies

Internet stocks traded down for the month of January, in conjunction with the broader market NASDAQ Internet Index (NASDAQ:QNET), which ended with a decline of 2.2%. In this report, we discuss some of the key events from the past week for America Online (NASDAQ:AOL), Google (NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO).

AOL

America Online (NASDAQ:AOL) has been focusing on its content and ad business in order to reduce its dependence on the internet subscription and content business. During the month, the company’s stocks grew by 2% due to news that Starboard Value, an activist hedge fund, was cajoling Yahoo to acquire it. However, the company is pursuing its strategy to cut cost by shuttering some of its non profitable websites.  We believe selling these non-profitable websites is a step in the right direction as the compnay can focus on developing content for its premium websites such as Huffington Post, Engadget, etc., and invest on its programmatic platform. Our valuation of $41.97 per share (market cap of$3.3 billion) for the company is 4% below the current market price of $44.04 per share (market cap of $3.4 billion). We expect AOL to report revenue of around $2.40 billion and net income of $220 million for 2014. We forecast non-GAAP diluted EPS of $2.86, which is inline with the market consensus of $2.83 (Reuters).

Google

During the month, Google announced that it is preparing to sell mobile phone plans, through Sprint, directly to customers and manage their calls and mobile data over a cellular network. ^[1] Furthermore, the company announced that it plans to rollout its fibre optics services in four new metro areas and 18 cities. ^[2] However, Google announced that it is suspending sales of Google Glass hardware following a troubled trial period during which the device has been widely criticized as a threat to privacy, with many early advocates in the tech world giving up wearing the product. For the month, Google’s stock declined by 3%, more than the 2.2% market selloff. Our valuation of $547 (market cap of $371 billion) for the company is 7% higher than the current market price (market cap of $347 billion). We are in the process of updating out Google model as it has recently announced its results. At present, we expect Google to report revenue of around $55 billion (excluding Traffic acquisition cost and revenues from Motorola) and net income of $15.7 billion for 2015.

Yahoo

Yahoo’s stock underperformed the market as it declined by 5%, and traded in the $44-$50 range. During the month, Yahoo announced its results for Fiscal Year 2014. The results indicated the troubles facing the company as it failed to deliver growth yet again. However, Yahoo announced that it was spinning off the 384 million shares of Alibaba into an independently registered investment company to be named SpinCo. This announcement was met with enthusiasm in the market as the stock was trading up. The company expects to effectuate the spin-off in Q4 of 2015. However, the stock declined after Alibaba, its associate company in which it has 15% stake, posted disappointing results. Currently, we value Yahoo at $47.29 per share (market cap of $47 billion), which is 7% above the current market price (market cap of $43.9 billion). We expect Yahoo to report revenue of around $4.54 billion and net income of $440 million for 2015. We forecast non-GAAP diluted EPS of $1.38, which is slightly below the market consensus of 1.40 (Reuters).

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1. Google to sell wireless service in deals with Sprint, T-Mobile: The Information, January 21 2015 [↩]
2. Google Fiber confirmed for four new metro areas, 18 cities,  January 28 2015 [↩]