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3 internet stocks with greater downside risks

Chris Lau, Kapitall: Stocks with greater downside risks are vulnerable to market volatility. Keep an eye on these three.

Last week’s volatility for markets was less severe than it was earlier in April. Trading volume is slightly lower, but investors cannot ignore the rising risks as markets lose all of the week’s trading gains last Friday, April 25 2014. Stocks that have even more downside than the general indices are those whose price-earnings multiples are too high. Shares of Amazon.com ( AMZN), LinkedIn ( LNKD), and in Netflix ( NFLX) may have further to fall.

Netflix worst monthly performer

Netflix performed the worst in the last month. Shares are now around 30 percent below a 52-week high reached at the beginning of March. There is now a new risk: net neutrality might be ending. This means the FCC might let ISPs (internet service providers) charge more for priority access to their networks. Netflix already pays more to Comcast so streaming speeds for Netflix on their network is faster. As the pricing discount for receiving content on Netflix and cables shrinks, growth for Netflix will slow.

Read more from Kapitall: Try these 7 rallying Indian stocks as country gears up for elections

Amazon, the online consumer discretionary giant, dropped around 10% after quarterly results did not meet analysts’ consensus. Paid growth dropped nearly one-quarter in Q1. One bright spot was AWS (Amazon Web Service). Revenue from Cloud services grew 60 percent, though it only accounts for 6 percent of revenue.

LinkedIn is trading near yearly lows, down 38.6 percent from its high reached last year in September. Enthusiasm for social networking stocks is declining. Facebook ( FB) and Twitter ( TWTR) are also down 20 percent and 44.3 percent, respectively, from yearly highs. Concerns from the market that valuations are too high are building, though analysts are still bullish on Facebook and LinkedIn.

Downside could be limited

Negativity for markets could slow, which would mean the stocks mentioned could rebound. Still, even with sound fundamentals, valuations should still dictate the stock price in the future. For now, the risks of stocks in social media, Netflix, and Amazon.com are still high. It would be a good idea to watch these stocks for now.

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