RBC: Buy these five beaten-down Internet stocks

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Influential RBC Dominion Securities analyst Mark S. Mahaney has issued a list of five U.S. Internet giants that are looking perfectly ripe for buying after the recent drubbing in the tech sector.

Large-cap Internet stocks, which total 13 in all, are down 17 per cent since March 5 (as of the close of trade on Tuesday of this week).

That makes for an interesting setup heading into the first-quarter earnings season, given that generally low expectations for the sector seem already factored into share prices. Twelve of the 13 largest cap Internet stocks have underperformed the S&P 500 index since their respective fourth-quarter results were released less than three months ago, notes Mr. Mahaney.

Here are the five stocks Mr. Mahaney thinks you should buy given their recent weakness, and a summary of his views on each.

1. Priceline
RBC has a $1,500 (U.S.) price target. Mr. Mahaney thinks Street estimates are particularly cautious for the Internet e-commerce site, and therefore carries the least risk for an earnings disappointment.

"Priceline remains one of our Top 5 large cap long ideas and our favourite online travel name. The company's very strong growth track record, combined with its current 19x 2015E P/E valuation, give us confidence. We think there are many factors that might be underappreciated about the Priceline story: it is a beneficiary of the current macro recovery in Europe; it likely has entered a cycle of market-share gains in the U.S.; it has a new international growth story with its rental cars segment; it is gaining significant traction in Asia-Pacific and Latin America; it is benefiting from incremental same-day hotel bookings via its Mobile presences; it has significant opportunity to grow its penetration of current lodging partners; and there is the possibility of leverage in online advertising."

2. Amazon
RBC has a $425 price target. Mr. Mahaney notes its current enterprise value to earnings before interest, taxes, depreciation and amortization multiple is 16 per cent below its average.

"We think that Amazon remains one of the best plays on the 10 Internet growth factors (mobile, cloud, same-day delivery, alternative payments, etc.). We still believe that Amazon is at a fundamental inflection point, i.e., revenue growth acceleration and margin expansion, given easing comparisons, a strong video game cycle, international Kindle eBook development, strong Kindle product refreshes, macro recovery in the key European market, very strong momentum in its consumer staples & fashion/apparel segments, very strong AWS (Amazon Web Services) traction, and leverage in its fulfillment expenses."

3. Netflix
RBC has a $500 price target. Mr. Mahaney sees reasonably low risk that it will disappoint the Street with its earnings, given a lot is already known about its subscription model and a quarterly survey conducted by RBC showed positive results.

"Despite dramatically outperforming in '13, we believe NFLX can continue to outperform in '14. Fundamentals are getting stronger: Subscription adds are increasing (both in U.S. and International), churn is falling, contribution margins are rising, etc. Full Flywheels are in effect. And our four catalysts are starting to emerge: 1. Evidence of pricing/tiering/ARPU power – our survey work shows nice takeup for the $11.99 plan and, more importantly, a larger sub base creates tiering opportunities; 2. MVPD (multichannel video programming distributor) distribution deals – first domestic integrations now expected in '14; 3. International market/s profitability – contribution profit/loss improving sequentially in every market; and 4. More successful Original offerings – audiences build over time for high-quality content (House of Cards, Turbo F.A.S.T., Orange Is the New Black, etc.). Netflix is becoming an Internet Video Utility."

4. Google
RBC has a $710 price target.

"We continue to believe that Google is one of the best-positioned stocks for many of the secular growth drivers in the Internet space: the dramatic mobile shift, the migration of TV ad budgets online, the growing importance of local Internet, and the Internet of Things. We believe this gives Google the opportunity to become a revenue growth acceleration story, a margin stabilization story, or both. The MMI (Motorola Mobility) divestiture likely strengthens the business–Google can now focus on core competencies and the kind of long-term forays that have been successful in the past. We think that current valuation at about 18x 2015E P/E does not fully capture the value of core Google and its significant moats in the search and display business."

5. Facebook
RBC has a $76 price target.

"Facebook has accelerated its fundamentals growth over the last three quarters. Robust user growth, engagement that continues to creep higher, and advertising revenue growth driven by mobile have been hallmarks of this recent outperformance. With more than 50 per cent of revenue coming from mobile, Facebook has become one of the leaders in adapting to the most important Internet industry trend. Plus, the company has demonstrated opex discipline and operating leverage to boot. We still see Instagram monetization and Auto-play video advertising as growth catalysts in the near future. Also, the company's focus on ads quality is likely to lead to both increased ads and higher effective pricing over time."