Jack Myers Media Wall Street Report 01-20

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This was the week that almost wasn't. Or, at least in the online arm of media. Numerous websites, including the massive Wikipedia, went dark in protest of anti-piracy bills being floated in both the House and Senate (SOPA and PIPA). Yahoo Finance's Aaron Task said that opponents of the bills feel that their passage would "result in virtual government censorship of the Internet, force many sites to go black and stifle innovation."

With the backdrop of a partial Internet blackout and earnings season heating up, analysts had their hands full when Yahoo's (YHOO) founder Jerry Yang announced he would be departing the company. Investors were clearly happy and sent the stock up over 10% during the week.

Analysts were juiced too, hoping for a bigger management change and some M&A for the Internet pioneer. Needham's Laura Martin wrote in a note to investors that Yang's departure "is a datapoint that YHOO is closer to selling these assets [Chinese B2B firm Alibaba and Yahoo Japan] than the market assumes." With the departure of Yang, who appears to have scuttled previous attempts to sell the company, she's more positive a deal gets done at a higher price than Yahoo's $16 and change.

Henry Blodget at The Business Insider took a more sentimental approach to framing Yang's move. He believes Yang leaves behind a tremendous legacy, having founded one of the premier online media firms. "17 years ago, Jerry and his fellow grad student David Filo started a list of web sites in their dorm room. And 17 years later, that list has become a global corporation with ~10,000 employees, 700 million monthly users, a $20 billion market capitalization, and ~$5 billion of annual revenue," Blodget wrote after Yang announced his departure.

eBay (EBAY) was one of the first Internet firms to announce its quarterly earnings and the Street appeared to like what it heard, sending the stock up 3.86% on Thursday. Barclays Perry Gold sounded almost relieved by the online auction firm's 2012-2013 outlook and reiterated his firm's $37 price target. Much of next year's upside is coming from the company's payment unit, PayPal. "The guidance raise to 25-26% segment margins in 2013 (from 24-25%) and $4B in 2011 mobile TPV (with $7B guide for 2012) was encouraging," Gold wrote in a research note to investors. JPMorgan's Doug Anmuth may also have a $37 PT but in a note to clients, he sounded downright concerned. He wrote, "we believe the decelerations in U.S…are somewhat concerning."

Nomura's Brian Nowack was impressed with the mobile payments turnout at CES last week. In a missive entitled "The 1%", he's sounding pretty bullish on eBay's PayPal opportunity, especially as Home Depot rolls out a 51 store pilot with the mobile payments processor. The short of it is if PayPal can garner just a 1% penetration rate into the top 10% of retail, it would add 500bp to the firm's already robust growth rate. The money line from the research report: "the most sure bet in the house seems to be the "over" on the number of times this year we'll be asked 'what's your PayPal PoS estimate in 2015?'".

Movie theater chain Cinemark (CNK) rounded up its investors this week for a conference call regarding the strength of its international business. The international unit, which accounts for almost 30% of total revenues, is juking and jiving — Barclay's Bo Tang estimates screen growth in Latin America was about 20% in 2011. Cinemark continues to hit the mark, outpacing the North American box office for 12 straight quarters. Tang likes the stock and has a $24 price target on it.

Earnings season appeared a good a time as any for JPMorgan analysts to launch coverage of a few new Internet names. Doug Anmuth started Expedia (EXPE) off with a brutal Underweight. He's concerned of the cost of continued brand building and the role Google may continue to play in travel search/bookings. Anmuth launched Expedia with a $31 price target, based off of 10.5x P/E multiple on his firm's $2.94 2013E adjusted EPS.

Anmuth and team must have not taken their vitamins because they launched coverage on another online travel stock, TripAdvisor (TRIP), with a Neutral and a $31 PT. He's seeing 20% top end growth out for years and he likes the firm's expansion in China. His lukewarm rating is just that he's taking a wait-and-see approach on Google's continue roll-out into travel search. Shares are also expensive, post spin-out from parent, Expedia.

With all eyes on Google (GOOG), expectations were high this week on the search engine's quarterly results. Unfortunately, the recent move upwards (up 10% over 3 months) was quickly reversed with somewhat disappointing results out of the Googleplex. Google disappointed investors and analysts alike, like BGC Partners' Colin Gillis, who expected to see positive click price growth push the core business to new records. The stock won't get to his $650 stock price just yet — it fell 9% afterhours.

Google missed on net revenues clocking in at $8.13B on the quarter, while analyst consensus was at $8.4B, a rare miss for a company that's beat expectations for the past eight quarters. Overall, excluding certain items, Google earned $9.50 per share, missing forecasts for $10.49 a share. International revenues and growing operational expenses contributed to the shortfall. But JPM's Kaizad Gotla thinks that the miss obscured the real story: "we believe it's hard to argue with 34% paid clicks growth, improvements in search ad quality that should ultimately drive incremental revenue, and a display business that is now on a $5 billion run-rate and accounts for ~12% of gross revenue," the analyst shot off in an investment missive this morning. He kept his Overweight but brought his team's price target down to $686 from $730.

Credit Suisse's Spencer Wang maintained his price target in the face of the miss, citing the fact that the longer term investment thesis is still intact. Similarly, Barlcays Anthony DiClemente was impressed with the growth numbers, but brought down his estimates in the face of FX and CPC pricing.

For Google to make money, advertisers need to be spending it. Deutsche Bank's Matthew Chesler produced a great overview of 10 industry themes for the advertising industry in 2012. His team was more optimistic in 2011 but this year, his theme is so far, so good. The macroeconomic picture is weakening — a bad thing for agencies as firms pull back spend — but not nearly to the tune they were cutting in 2008/2009.

DB thinks media buyers are drinking a little too much advertising spend Kool-Aid. Chesler wrote, "The lowest forecasts are from Zenith (part of Publicis), which is still forecasting 4.7% global growth in 2012 (US +3.5%) — too optimistic we think!" 2012 also appears to be a year of reallocation of assets, as global agencies place their efforts and attention on higher-growth geographies (U.S., Asia) and away from Europe. "The company with the largest revenue exposure to non-Europe, non-US markets is WPP (WPPGY), equating to 28% of the group, followed by Publicis (PUBGY) at 20%. Both Omnicom (OMC) and IPG (IPG) are at less than 20%, we estimate, while MDC Partners has no practically exposure (yet)," the authors of the report wrote regarding global agency exposure.

The investment bank also sees a bigger mix of revenues in digital going out into the future as advertisers divert money into social and participative media. What's really interesting is that fast moving consumer goods (FMCG) firms (consumer) is the largest vertical for agencies, yet it's been one of the weakest spenders in digital to date . This is a big opportunity for growth when the FMCG purse strings open to social media, video, search, mobile, and data/analytics.

Michael Nathanson at Nomura also had an update to his financial models for agencies in 2012, he's revising his estimates upward for Omnicom (OMC) . Based on chatter among industry CEOs about a surprisingly strong end of 2011 and a good start to 2012 and a review of macro inputs, he's boosting his target to $52 (from $46). He's also increasing estimates for IPG from $10.50 to $12.

One group of stocks that doesn't benefit from that shift to digital is local media companies. According to a report from BIA/Kelsey, local media stocks were collectively down 18.7% in 2011, as newspapers and yellow pages continue to suffer.

Laura Martin published a review of the TV industry this week in a research email from Needham and Co. She sees revenues coming from the whole TV ecosystem to top $165B. That sum includes $85B of subscription/license fees paid to cable, satellite, and telephone. The remainder derives from TV advertising. She's chomping at the TV Anywhere bit and estimates the rollout over the next 3-5 years could add approximately another $12B to the mix. She writes, "These dollars dwarf any near-term revenue streams from digital platforms (Hulu, YouTube, etc). Additionally, these are low risk dollars as adding services to the TV bundle suggests additional revenue rather than economic cannibalization." She believes Time Warner Cable (TWC) and Comcast (CMCSA) should be two of the biggest beneficiaries from TV Anywhere.

Goldman Sach's Brian Karimzad took down his expectations on gaming firm, Electronic Arts (EA). He slashed his FY13/FY14 estimates to $1.10/$1.40 from $1.16/$1.52 based on increasing opex. He's not expecting much force from EA's Star Wars MMO game and expects EA to reinvest in mobile and social games. His reduced expectations spillover into his price targets, which he also brought down from $25 to $22.

Games aren't selling particularly well and DVDs are faring worse. Based on poor sales of Kung Fu Panda 2 on home video, Goldman Sachs' Drew Borst downgraded DreamWorks (DWA) to Sell. "We see this as part of a secular shift and reduce home video estimates for all future films. On average, we reduce 2012/13 EPS estimates 19% and we are now 10% below consensus," he wrote in a bulletin to investors.

It's Netflix's (NFLX) overvalued DVD business that really prompted Janney's Tony Wible to kickoff coverage on the stock with his own Sell. The analyst believes the move towards streaming will dilute the large base of DVD earnings of the rental giant. The firm has a fair-value estimate of only $53 on NFLX.

Summary

While investors cheered Yahoo's news, this week's darkened Internet may foreshadow a tough earnings season for media stocks.

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