Top 5 Internet Stocks

NEW YORK ( TheStreet) -- Citi has initiated coverage on the Internet sector, targeting a wide array of topics and names, from Google ( GOOG) to Amazon ( AMZN) to Yahoo! ( YHOO). Those three, as well as eBay ( EBAY) and AOL ( AOL), received buy ratings.

In all, Citi started coverage on 11 names, noting that "the Internet industry is still in the early innings of its growth cycle." Analyst Mark May notes that the sector is poised to see a surge of Internet-centric consumers who are in the prime of their buying and influence stages, primarily driven by the Millennials. As this group continues to gain more influence in the U.S. economy and makes larger and more purchasing decisions, it's poised to shape commerce.

The Internet is also benefiting from the mass adoption of smartphones and tablets, as well as high-speed access, which connects more and more devices, not to mention the "Internet of things."

Citi started coverage on Netflix ( NFLX), LinkedIn ( LNKD), Facebook ( FB), Yelp ( YELP), and Zillow ( Z), with neutral ratings. The research firm is constructive on these names, but either valuations are lower, or near-term issues, such as catalysts or expectations, are not as clear as for some of the other higher-rated names.

Only OpenTable ( OPEN) was given a sell rating, with May noting that, while it's still a good business, "...the valuation and expectations do not reflect the level of serviceable market penetration and likely deceleration in growth over the next 2-3 years."

Here are Citi's top five buy-rated Internet stocks.


May, who has an $1,100 price target on Google, believes the Mountain View, Calif.-based company is the best combination of growth, price and long-term confidence in both management and a strong position in several growth areas.

In the short run, May believes Google could see a benefit as mobile ads might start to boost, rather than hurt revenues.

Google is scheduled to report second-quarter results on July 15. Analysts polled by Thomson Reuters are looking for earnings of $10.78 per share on $14.45 billion in revenue.

Shares have outperformed the broader Nasdaq significantly this year, as several analysts have put $1,000 price targets on the Internet search giant. Google shares have gained 27.97% year-to-date.

GOOG Chart GOOG data by YCharts


Amazon, which has its hands in everything from e-commerce, to cloud computing and hardware, is seen as one of the more innovative and disruptive companies, along with Google.

May believes Amazon is poised to move higher, and deserves a higher multiple than its peers in these areas because of faster growth.

"Our analysis suggests that Amazon's retail business trades at a comparable multiple to retailers like Wal-Mart as does its AWS (Amazon Web Services)/advertising business to its IaaS (Internet-as-a-Service), SaaS (Software-as-a-Service) and advertising comps despite both segments having significantly faster growth and optionality," May wrote in the report. "We believe investors underestimate the impact that 3P mix and fixed infrastructure leverage in the U.S. will have on the retail margins, and they underestimate the opportunity for AWS, esp. in the hybrid/private cloud arena."

May notes that shares could trade to his $340 price target over the next 12 months as these factors are taken into account and the market continues to realize the growth that's being accumulated by the company.

Amazon, which has gained 16.2% year-to-date, is schedule to report earnings July 22. Analysts surveyed by Thomson Reuters are looking for the Seattle-based Internet giant to earn 6 cents per share on $15.74 billion in revenue for the second quarter.

AMZN Chart AMZN data by YCharts


Since Marissa Mayer started at Yahoo! (someone I admittedly called the wrong choice), shares of Yahoo! have been one of the best performers in the space. Not only has she turned around the culture of the company, with free food, free iPhones and the like, but she has started to make bold bets as well, recently acquiring Tumblr.

Aside from Mayer and the continued efforts to turn core-Yahoo! around, May notes there are two other ways to win with the Sunnyvale, Calif.-based tech titan. The upcoming Alibaba initial public offering should help Yahoo!, especially if the company is valued greater than $65 billion. Recent reports have pegged the company's valuation at around $70 billion, but the company is still deciding on which exchange to list and the right timing for an offering.

May also notes that a "liquidation of Japan stake in a tax-free way" would be beneficial and help Yahoo! hit his $30 target price. Yahoo! currently owns 35% of Yahoo! Japan. The recent price appreciation in Yahoo! Japan, along with increased optimism around an Alibaba IPO, has allowed Yahoo! shares to return 34.04% year-to-date.

Analysts polled by Thomson Reuters expect the Mayer-led Yahoo! to earn 30 cents per share on $1.08 billion in revenue, when it reports earnings on July 15.

YHOO Chart YHOO data by YCharts


eBay ( EBAY) is another bell-whether pick from May, and a name he calls, after GOOG, "arguably our next best GARP idea." The company's Marketplace segment, which is the online auction business, is back, under CEO John Donahoe. May notes it's "...well positioned for the secular convergence of online/offline retail and for m-commerce." The segment is seeing 15% top-line growth, and accounts for more than 40% of the company's margins.

The company's PayPal division, which has helped lead the boom in mobile payments, could be its biggest upside if its offline initiative takes hold. "We estimate that every 100bp gain of offline market share equates to $400mn in incremental EBITDA and $4 (6%) upside to our target," May wrote in the note.

Shares have underperformed this year, gaining 7.75% year-to-date, but May thinks the stock could trade to $65 over the next year, as PayPal continues to drive growth, and the Marketplace business continues to rebound.

Analysts surveyed by Thomson Reuters are looking for earnings of 63 cents per share on $3.89 billion in sales for the second quarter.

EBAY Chart EBAY data by YCharts


AOL ( AOL) is the last top pick from Citi, and one most don't associate with the new wave of Internet. However, CEO Tim Armstrong has turned AOL into a content powerhouse, owning such names as Huffington Post, TechCrunch and others, to continue to drive ad dollars.

May notes shareholders are being paid to wait, with the stock trading at 6 times EBITDA, and yielding 7% on its free cash flow. "If AOL can sustain the 1Q13 acceleration in brand revs and can continue to rationalize losses, the multiple could expand and the stock could hit $43 in 12 months."

Analysts surveyed by Thomson Reuters expect AOL to earn 32 cents per share on $538.84 million in sales for the second quarter.

AOL shares have gained 27.85% year-to-date, outperforming the broader Nasdaq, which has gained 16.25% since the start of the year.

AOL Chart AOL data by YCharts

-- Written by Chris Ciaccia in New York

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