Top 3 Internet Stocks For The Second Quarter (Update 1)

Updated from July 12 to include expected stock price reaction for Amazon and LinkedIn.

NEW YORK ( TheStreet) -- Even with the global economy slowing due to weakening numbers out of China and continued austerity measures in Europe, Citigroup likes Amazon ( AMZN), Priceline ( PCLN) and LinkedIn ( LNKD) as its top three large cap Internet names for the second-quarter earnings season.

Analyst Mark Mahaney believes that valuations for the Internet names are now "neutral," as he slashed second-quarter and full-year earnings estimates for Amazon, Priceline, LinkedIn, as well as Groupon ( GRPN) and eBay ( EBAY), explaining that " m acro & FX create greater than normal risk this EPS season." Mahaney took down earnings estimates between 1% and 3% for the companies.

Despite these concerns, the analyst says that recent weakness in the price action of certain names is providing attractive entry points, as earnings season kicks off.

Here are Citigroup's top three Internet large cap names for the second quarter earnings season of 2012.


The biggest risk for the online travel company is its third-quarter outlook, not the second-quarter earnings result. The Norwalk, Conn.-based firm has the "largest Euro exposure of any Net stock," Mahaney noted in his report. His quarterly estimates are slightly higher than Wall Street, but he sees "greater than typical risk to the downside."

Even with short-term concerns over Europe, priceline is viewed in a very favorable light, as online travel continues to see strong growth.

"We continue to view priceline as a Core Long in the Internet Large Cap sector based on reasonably sustainable competitive advantages in Europe, a countercyclical hedge in the U.S., significant Asia & Latin America growth driver with Agoda and, a pretty consistent track record of market share gains, and one of the best management teams in the Internet sector," Mahaney penned in his note. He rates priceline shares "buy" with an $850 price target.

Analysts polled by Thomson Reuters expect priceline to earn $7.36 a share on $1.35 billion in revenue. The company will report its second-quarter earnings results on Aug. 7.

Shares have soared year-to-date, gaining 36.66%, far outpacing the 10.52% return in the Nasdaq.

PCLN Chart PCLN data by YCharts


Amazon will report second-quarter earnings later this month, and Mahaney believes that the online retailer's revenue growth could slow from 34% year-over-year to 30% year-over-year, as foreign exchange and macro headwinds prevail in the quarter.

comScore noted that there was a 107% increase year-over-year in Amazon's page views in May, down from 114% in April. "We have noticed a reasonable level of correlation (R-squared ~ 90%) between Page Views and AMZN's reported NA (North American) revenues," Mahaney noted.

Despite these short-term concerns, the analyst cited management strength, as CEO Jeff Bezos and his team continue to focus on innovation and experience. Mahaney also highlighted Amazon's "competitive moat," the continued trend towards e-commerce, and an attractive business model as reasons to own the company for the long term. He reiterated his "buy" rating and $275 price target.

Analysts polled by Thomson Reuters expect Amazon to earn 2 cents a share on $12.91 billion in revenue. The company will report its second-quarter results on July 23.

Going back to 2009, Amazon shares have increased six times on the day after their announcement, and fallen six times, with one time notching a 0% gain, according to Mahaney's research.

Shares of the online retailing giant have jumped 24.41% year-to-date.

AMZN Chart AMZN data by YCharts


LinkedIn, which reported better-than-expected first-quarter results in May, may see some foreign currency headwinds this quarter, as approximately 20% of its revenues come from Europe. Citi rates LinkedIn shares "buy" with a $125 price target.

Despite clouds of economic uncertainty in Europe, though, growth in the U.S. is still strong, albeit decelerating. "In the U.S., growth in the average number of Unique Visitors to LinkedIn decelerated to 15% Y/Y in Q2TD vs. Q1's 22% Y/Y increase, 'tho comps are tougher by about 25-pts - a thus largely positive trend, in our opinion," Mahaney said in his note.

He did note that engagement amongst users is up, as Total Minutes, Page Views, and Site Visits experienced accelerating growth in the quarter.

Job postings are also on the rise, increasing about 24% sequentially. "All in, we'd characterize such job postings growth as a neutral to positive read-thru supporting our revenue growth assumptions."

Analysts polled by Thomson Reuters expect LinkedIn to earn 16 cents a share on $216.08 million in revenue. The company will report its second-quarter results on Aug.3.

LinkedIn has only reported quarterly earnings three times since going public. "We note that since LNKD reported Q1 EPS, shares are down 7% (from May 4th to July 9th), vs. a 1% increase in the S&P 500 over the same period," Mahaney wrote. He believes expectations are muted going into the earnings report.

LinkedIn shares have jumped 66.97% year-to-date, the best among the group.

LNKD Chart LNKD data by YCharts

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-- Written by Chris Ciaccia in New York

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