NEW YORK (
) -- Internet stocks will be in focus this week, as several major players report third-quarter earnings.
Overall, online spending remained in the 10% to 15% range during the quarter, despite sluggish consumer trends. As a result, Janney Capital Markets analysts expects companies' results to come in-line to slightly above forecasts.
Looking ahead to the fourth quarter, guidance should remain conservative, Milne said. Still, most Wall Street estimates already account for tougher comparisons during the holiday season.
Internet retailers may also receive a boost from the increase in consumer engagement from social media and mobile devices, which provide new sources of traffic for these companies.
The biggest question heading into
third-quarter earnings results on Wednesday, is: Can the company keep up its rapid growth pace?
At least in the third quarter, it seems likely. Analysts are forecasting earnings of 72 cents a share, on revenue of $551 million.
Netflix's subscription business is, no doubt, seeing a boost, due to the availability of more platforms like
Wii, as well as its expanding content library. Over the past several months Netflix has reached new streaming agreements with Relativity Media, Warner, EPIX, Nu Image/Millennium Films, Universal and Sony.
Netflix also started a streaming service in Canada in September, its first foray outside of the U.S., while the closure of brick-and-mortar stores should also present an opportunity for market share gain.
filed for Chapter 11 bankruptcy protection last month, and analysts predict it will shutter about 25% of its store base over the next year. Wedbush analyst Michael Pachter expects Blockbuster's overall revenue will decline by about $400 to $500 million, $100 million of which Netflix could capture. Movie Gallery also completed its liquidation over the summer.
Netflix's stock is currently trading more than 40% higher since it announced its second-quarter earnings results, and Citi analyst Mark Mahaney foresees little risk to the stock heading into this week's earnings report.
Given these catalysts, Netflix could potentially raise its 2010 outlook slightly from current levels, Pachter predicts. Netflix foresees 2010 earnings in the range of $2.58 to $2.86, revenue between $2.14 billion and $2.16 billion and subscriptions of 17.7 million to 18.5 million.
But looking toward next year, the optimism for Netflix starts to wane. Susquehanna Financial analyst Marianne Wolk downgraded Netflix to sell at the beginning of the month, saying the risk/reward of the company is off balance. Netflix is currently trading at $153.90%, up 48.5% since reporting second-quarter earnings, and 27.5% ahead of Wolk's valuation of $120, which she raised over the summer.
"Once the installed console base is saturate, we expect to see new subscriber additions only from new console purchases, slowing the rate of growth by mid-2011," Pachter wrote. "We believe Netflix will be challenged to grow at its current pace for more than another year, and we expect its premium valuation to contract. "
is expected to meet or slightly exceed its third-quarter earnings forecast when it reports on Oct. 21.
Analysts are calling for a profit of 48 cents a share on revenue of $7.35 billion. Amazon's stock is up about 30% since it reported its second-quarter results.
"Amazon is one of the most attractive large-cap Internet stocks and the best play off the secular growth in online retail," Mahaney wrote in a note.
Of course, its Kindle e-reader remains one of the attractive and interesting parts of Amazon's business. Mahaney said that based on his channel checks he now foresees about 5 million Kindles and 125 million Amazon e-books being sold by the end of the year.
This growth comes after Amazon's latest price cut, as it is now offering its Wi-fi-only device for $139 and its Wi-fi/3G version for $189. This is supported by aggressive marketing and distribution strategies, Mahaney wrote.
Aside from buying the Kindle directly through Amazon, shoppers can now find it at other retail locations like
Zappos also holds significant growth potential for Amazon, and investors will be awaiting any news on its plans to expand into apparel.
Looking ahead to the fourth-quarter, margin guidance is expected to remain pressured, especially given the company's recent move to lower the free-shipping threshold in part of Europe, Milne wrote.
already eliminated the chance that it will report blow-out earnings results when it pre-announced third-quarter profit in September.
The company said third-quarter earnings would fall on the high-end of its forecast in the range of 35 cents to 37 cents a share. Analysts are calling for a profit of 37 cents.
Janney Capital Market analyst Shawn Milne said the third-quarter was driven by strong growth at PayPal, and U.S. marketplace trends remain stable, with potential upside from the second quarter. Fourth-quarter guidance is also expected to be in-line with guidance.
During the quarter, eBay also announced the departure of its head of marketplace, Lorrie Norrington, adding a level of uncertainty as the unit is in the midst of a three-year turnaround.
Still, Susquehanna analyst Marianne Wolk is doubtful Norrington's resignation points to deterioration in the core marketplace business. "The core marketplace's business has been underperforming over the last few years with lackluster results exacerbated by global macros weakness," she wrote in a note. "With the number of changes implemented on the marketplace over the first half of the year, a benign macro environment could yield improvements in the core business by the holiday season."
"We believe the value of the core eBay franchise is underappreciated," Wolk wrote in a note. "This brand reaches more than 92 million active worldwide users. With improvement in the economic backdrop, we believe usage levels and monetization could improve."
eBay has $6.7 billion in cash and no debt, making it well positioned to pursue M&A targets for diversification into higher growth markets or geographies, Wolk wrote. Of course, it could also issue a dividend or buyback shares.
--Written by Jeanine Poggi in New York.
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