Wall St. Bloodbath for Many Internet Stocks - 7-27-12

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Well, there's no use beating around the bush: this week was a bloodbath for (many) Internet media stocks. Investors could blame the week on Apple (AAPL) which stunned investors by reporting a messy quarter. A shortfall in iPhone sales and a weak European economy were paired against a quarter that saw massive iPad momentum (market research firm IDC raised its iPad forecast while turning down estimates for Android tablets). Apple announced it had sold 17 million iPads in the June quarter, beating Wall Street numbers by 1 million. That's 84% y/y growth, but apparently not enough for investors. The stock sold off about 4.5% on the earnings news.

Facebook

All eyes were on Facebook (FB) Thursday when it reported its first-ever quarterly earnings as a public company. And the pressure was on with Apple's spotty quarter and Zynga's massive miss (see below), pushing the stock down over 8% during Thursday's trading before the announcement. Turns out the social network held its own, reporting Q2 revenue and earnings lines on par with expectations. According to Barron's, "Revenue in the three months ended in June rose to $1.18 billion, yielding EPS of 12 cents, excluding some costs. Analysts on average were modeling $1.15 billion and 12 cents." While the firm might have hit its targets, investors are giving the message that it just wasn't enough to live up to the hype or make up for the botched IPO. The stock traded down over 5% in the aftermarket. Even without that drop, Facebook shares are down 29% from the $38 IPO price in May.

Zynga

What happens when your biggest source of users (80% of bookings) gets more serious about competing against you? Just ask Zynga (ZNGA) about Facebook. The casual gaming firm just laid an egg, reporting quarterly revenue of $316M (consensus was $344, though analysts were rapidly bringing down expectations). The stock gapped down over 40% on the news. Worse, forecasts for the next two years were being materially revised downward to account for Facebook eating the firm's lunch, a mix shifting in favor of lower monetizing games, and poorly performing titles. J.P. Morgan's Doug Anmuth believes Facebook changes to the News Feed algorithm (apparently, favoring newer games), the shift to mobile, and the delayed launch of The Ville will put pressure on ZNGA for some time to come. He downgraded ZNGA to Neutral, citing the firm's cash balance of $1.6B (60% of Zynga's premarket market cap) as an asset that could suggest share buybacks and other strategic opportunities.

AOL AOL (AOL) actually turned in a pretty clean quarter. Results were better than expected with revenue, EBITDA, and EPS were ahead of estimates. Total revenue of $531M declined 2% over 2011 results, though adjusted EPS of $0.23 was significantly better than the $0.16 John Blackledge of Credit Suisse expected. The Internet media firm raised its EBITDA guidance (to $375M from $350M) and Blackledge brought his numbers up as well. He now expects 2012 revenue of $2.15B (vs. $2.12B) and $1.17 in EPS (vs. $1.05). Ryan Ripp at Barclays explained in a missive to investors that AOL's plans for Patch remain "on track" -- the company reiterated its revenue estimates for Patch from $40M to $50M. It plans to roll out a new Patch near year end and is working to better integrate it with local commerce. Also, remember AOL plans to redistribute over $1B it received from a patent sale back to shareholders. Ripp raised his PT to $33 (from $31).

IAC/InterActiveCorp

IAC/InterActiveCorp (IACI) was another bright point amidst this week's doom and destruction in Internet media. The firm topped Barclays' Mark May's expectations (once again), turning in higher-than-expected growth in Media (growing 97% y/y), powered by Newsweek Daily Beast, Electus, and Vimeo. Search and Apps also performed nicely, growing 46% over last year. May raised his CY revenue outlook modestly for the diversified Internet firm, noting that IACI has been "one of the strongest and most consistent performers in our universe over the last three years, with solid double-digit growth, margin leverage, significant FCF, a diversified portfolio of Internet properties, and an aggressive share repurchase program." He's sticking with his Overweight rating while raising his PT to $63 (from $58).

Viacom

You remember the squabble between Viacom (VIAB) and DirecTV (DTV) we wrote about in last week's Wall Street Report? Well, it looks as though the two parties resolved their carriage dispute that resulted in a 10-day blackout of Viacom programming on DTV's 20M households. While initial press reports implied a low single digit increase, Janney's Tony Wible believes VIAB got a high single digit to low double digit annual increase over the life of the deal. He assumes a 10% discount on to its average fee and therefore, VIAB should see a 15% increase in DTV revenue (to over $600M per year). The media analyst is lukewarm on the shares, by the way, but does believe the stock should benefit from "buybacks, capital structure improvements, digital sales, and programming reinvestment."

Netflix

Though the VIAB-DTV negotiations were fanning the fear that power was shifting to distributors, Nomura's Michael Nathanson says hogwash to the idea that this was a critical turning point. Instead, he sees it as a pretty strong 7-year deal that says more about the strength of the "Heavyweight division of owners of broadcast networks, sports networks and/or cable networks." Unfortunately, a distributor like Netflix (NFLX) with subscription growth coming under pressure finds itself on the losing side of the great content/distribution tug-of-war. Reporting this week, the firm came in pretty much in line with its Q2 results, but majorly disappointed on its guidance. For Q3, NFLX expects 1.36M subs, below the 1.6+ million Credit Suisse analyst John Blackledge was anticipating. NFLX is also curbing its international expansion. He still likes the opportunity in the face of pricing changes and international losses and has an Outperform rating on the stock, though he brought his target price down $15 to $100.

Nielsen

Alongside many of the mainstays of new media which reported this week was data/metrics powerhouse, Nielsen Holdings (NLSN). It was a mixed quarter for the firm, reporting 2Q12 revenue of $1.385B, down 1% y/y and a Net Income number of $103M, up 49% y/y (18% above Needham's Laura Martin's numbers). She lowered her FY12 revenue estimates and raised operating EPS 5% to $1.07. She's got a Hold on the stock.

Internet Travel

Credit Suisse analyst Stephen Ju published earnings previews for Internet Travel plays, Priceline.com (PCLN) and Expedia (EXPE). Ju believes PCLN fundamentals are actually better than expected. PCLN added 23,000 hotels on Booking.com and its 230,000 hotel relationships as of 2Q12 end, suggests around 51% inventory growth (versus 56% in the first quarter and 62% a year ago). He's overweight on the name. For Expedia, Ju acknowledges that he missed an opportunity to participate in EXPE's improvements in conversion rates. With room night growth exceeding hotel relationship growth, the company's tweaking of the platform/site is paying off. The analyst is raising his estimates, and though he's neutral on the shares, he jacked up the PT to $51 (from $41).

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