Updated from 10:26 a.m. to include news on Facebook COO Sheryl Sandberg in the seventh paragraph.
NEW YORK (TheStreet) -- The technology industry has been hit hard, with high-growth names such as Pandora (P), Priceline.com (PCLN), Netflix (NFLX) and Facebook (FB) all having sharply corrected over the past few weeks. With these stocks down around 20% from their highs, now may be the time to buy, according to one analyst.
JPMorgan analyst Doug Anmuth noted that the recent selloff has "created some attractive opportunities in companies with continued strong fundamentals and growth potential ahead. Most of our discussions with investors point to initial concerns around rising interest rates, but quickly turn toward positioning and valuation."
With first-quarter earnings around the corner, these types of companies will have to demonstrate to investors that the recent selloff means little, and that the underlying strength in the companies' businesses is as strong as ever. Anmuth, who rates Facebook "overweight," said he believes that both Menlo Park, Calif.-based Facebook and Priceline provide the best combination of earnings power, growth and reasonable valuations, given the recent selloff.
Facebook shares touched a high of $72.59 earlier this year as momentum in the social networker exploded, particularly after the company announced the pending WhatsApp acquisition for $19 billion in cash and stock (that has come down since a good portion of the deal was done in stock).
Anmuth noted that Facebook is still early in monetizing its massive user base, now over 1.2 billion monthly active users (MAUs), and 1 billion on mobile apps. "We believe advertiser demand through 1Q continued to build and comScore data suggests continued strong engagement," Anmuth penned in a note. "Facebook's share of overall Internet time in February was ~18%, while the company's share of mobile time -- excluding Instagram and Whatsapp -- expanded to 22% in February from 21% in January."
As Facebook continues to deliver high returns for its advertisers, it can start to charge higher prices for its ads, something AdWeek recently pointed out. Facebook's ad prices may have ramped 10% from the traditionally strong fourth quarter to the first quarter, indicating the platform is seeing the return on investment (ROI) advertisers want, and then some.
Editor's Alert: Facebook COO Sheryl Sandberg, who has been very instrumental in sealing advertising deals for Facebook, announced on The Today Show that she would not be leaving the company. This comes after Sandberg recently sold a large chunk of Facebook stock, prompting speculation that she was running for politics.
Aside from Facebook itself, there is Instagram, which recently surpassed 200 million MAUs, and recently announced its own big advertising deal. The deal, with advertising giant Omnicom, was originally reported as being worth $100 million, but a source close to the situation described that pricing as "inaccurate." Anmuth believes that Instagram, as well as auto-play video ads, could provide upside surprise to earnings estimates. "We continue to believe it is early in News Feed ads and Facebook can sustain strong growth rates through higher demand, pricing, and engagement, and importantly, proving better ROI to advertisers. Facebook shares currently trade at 29x our 2015E earnings, and slightly higher when factoring in acquisition dilution."
When it comes to Norwalk, Conn.-based Priceline, the online travel giant likely has the greatest valuation support, with a earnings multiple of just 18 times 2015 estimates. Shares are down 13% from their March 5 high, and are up just 2% year to date. "We continue to believe Priceline is the best-positioned company in the online travel space and will continue to gain share in international markets," Anmuth wrote in the note. "We look for strong International bookings growth throughout 2014 (+34%), driven by Booking.com, Agoda, and Rentalcars.com, along with a more stable European macro environment."
Anmuth rates Priceline shares "overweight" as well.
Driving Priceline's strength is Booking.com, which now has over 425,000 hotel and other accommodation listings, according to the company's fourth-quarter earnings. With the company's 2012 acquisition of Kayak and continued investment in mobile, Anmuth believes there is more room to run, particularly in Europe, where Priceline is the dominant hotel marketplace.
"We believe there is still meaningful room for European hotel share gains of total European hotel nights, and we look for greater contribution from high-growth opportunities in LatAm and APAC," Anmuth penned in the research report. "We do not believe there is a strong bear case here, with concerns being that Priceline has been well-owned and that the company could increase investments and bring margins down. However, as we saw a year ago, we are comfortable with that trade-off as Priceline has shown strong returns in International growth through increased investment."
As for Netflix and Pandora, they are a bit tougher to value, but both are disruptive in their respective fields of online content distribution and Internet radio.
With Netflix shares having gone into bear market territory, down 23% from the March 4 high, and off 5% year to date, Anmuth is confident "Netflix can continue to improve the quality of its streaming video service to drive greater leverage and scale across its subscriber base, and ultimately exercise pricing power through tiered plans." He believes that the launch of House of Cards in February, along with other content, likely boosted subscriber additions, and that momentum should carry throughout the year.
The biggest fears surrounding Netflix, aside from increased competition, are the concerns about net neutrality, demonstrated in the recent additional payment from Netflix to Comcast (CMCSA). "However, we believe the recent Comcast deal came at economics that did not change the equation much for Netflix, and we have already seen early improvements in Comcast speed," Anmuth note. "We believe there is slightly more streaming video competition on the margin, with both Amazon and Hulu pushing into originals more and Amazon into the living room with FireTV. However, we continue to believe Netflix content is superior, and FireTV also features Netflix.
Terms of the Netflix/Comcast deal, announced in February, haven't been disclosed.
Anmuth rates Netflix shares "overweight."
Pandora, which has seen its shares collapse 28% since their March 5 high, remains Anmuth's favorite SMid-cap name (rated "overweight"), as it's a "highly compelling pure play on mobile advertising."
Here's Anmuth thoughts on Pandora:
"We note recently released March listener metrics included reacceleration of hours (+14% Y/Y and +13% M/M vs. +9% Y/Y growth in Feb-14 and +8% M/M growth in March-13) and continuation of gains in U.S. radio market share despite some increased competition. Importantly, we believe hours growth will accelerate more in 2Q as Pandora fully laps its 40 hour mobile listening cap starting in April. We believe that Pandora is at an inflection point on monetization, and profitability should increase going forward as 1) Pandora's 9.1% market share of total US radio continues to ramp; 2) radio buy-side platform integration and backend improvements should continue to remove friction from the buying process and attract more ad spend; 3) Pandora continues to build out its local sales force (now in 32 of top 40 markets); and 4) cost-control policies, including the limit to mobile skips, should help control content costs, enabling both more investment and better profit. Recent concerns continue to center around hours growth-even with better than expected March data-and increased competition. We look for significant increases in 2Q and 3Q hours growth, but also believe that low mobile sell-through rates (30-35%) and higher pricing can drive meaningful RPM improvements, with greater de-coupling between growth in hours and growth in revenue over time."
-- Written by Chris Ciaccia in New York
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