Running An Earnings Diagnostic on 10 Top Internet Stocks

We’re officially in the heart of third-quarter earnings season, and Wall Street continues to be distracted by the Ebola threat, plunging energy prices and the global economic slowdown. As a result, the S&P 500 has dropped about 3.6% since Alcoa kicked off the reporting season on October 8.

I encourage you to not get discouraged, though. Companies are bucking the trend, thanks to better-than-expected third-quarter results. In fact, Honeywell (HON) beat analysts’ earnings estimates on Friday, posting $1.47 per share vs. the consensus for $1.41, and its shares jumped 4%.

The highly rated stocks are outperforming even more, and I expect this trend to continue as we turn our attention to Internet stocks.

Some days it’s hard to believe that the Internet has only been part of our lives since the 1980s—and really not part of our daily lives until the 1990s. Today, the Internet impacts practically every aspect of our lives, from how we watch television to how we communicate with our friends and family to how we perform our jobs.

And many of the companies that have shifted and aligned their businesses to take advantage of the growth in the Internet are booming. But others haven’t perfected the secret sauce and continue to struggle in an Internet-driven world.

Earnings Spotlight: Google

Google (GOOGL) is an example of an Internet company that’s widely well-known, but one that you should be wary of investing in. This C-rated stock posted results from the third quarter on October 15, and they were disappointing.

The company announced that it earned $2.81 billion, or $4.09 per share, in the third quarter. Analysts were looking for $6.46 per share. Excluding certain items, Google would have earned $6.35 per share, missing estimates by 17.3%. Revenues were $13.2 billion, which was in-line with the consensus estimate.

The company saw a 30% increase in expenses during the quarter, largely due to the hiring of 3,000 employees. Average ad prices fell by about 2%. And paid clicks increased 17% year-over-year but is down from the 25% year-over-year increase in the second quarter.

Following the disappointing report, analysts revised their estimates lower for the fourth quarter and first quarter 2015. Watch out for this C-rated stock.

Internet Earnings Scorecard

eBay Inc. (EBAY) also posted third-quarter results on October 15. The company announced non-GAAP earnings of $848 million, or $0.68 per share on $4.4 billion in revenues. The 6% increase in earnings was due primarily to an increase in commerce volume growth. But I would avoid this D-rated stock: Analysts have revised their estimates lower for the fourth quarter and fiscal year 2014 in the past seven days.

PetMed Express, Inc (PETS) announced third-quarter financial results yesterday, and missed estimates. The company reported adjusted earnings per share of $0.19 on $57.6 million in sales. The consensus estimate was for $0.21 per share on $61.22 million in revenues. So PETS posted a 9.5% earnings miss and a 5.9% sales miss.

Upcoming Internet Calendar

Tuesday, October 21

Yahoo! Inc. (YHOO)—Shares of this Internet giant have climbed more than 15% in the past two months, thanks largely to the Alibaba IPO. Yahoo has about a 22% stake in the Chinese company, and could provide the company with substantial cash flow.

Thursday, October 23

Amazon.com (AMZN)—While everyone loves to receive the boxes with a smile, I would avoid this D-rated stock. Earnings are slowing down drastically, as the consensus estimate is for a $0.74 per share loss in the third quarter, down from a $0.09 cent loss a year ago. Plus, analysts have drastically revised their estimates lower in the past three months. Avoid.

Overstock.com (OSTK)—I’d also avoid this D-rated Internet stock. Analysts have revised their estimates lower in the past three months, and earnings growth is expected to diminish, falling 57% year-over-year.

Wednesday, October 29

Baidu, Inc. (BIDU)—As the largest search engine in China, Baidu has consistently grown earnings and sales. For the third quarter, the consensus estimate is for 52.7% sales growth and 12.5% earnings growth. Plus, analysts have revised their estimates 10.8% higher in the past three months, which bodes well for the company’s third-straight quarter of earnings surprises.

Shutterfly, Inc. (SFLY)—A picture is worth a thousand words, but the snapshot of Shutterfly’s earnings projections can be summed up in one word: poor. In the previous quarter, the company reported a net loss of $27.1 million, which is an increase from an $11.8 million loss a year ago. Beware of this D-rated company.

Thursday, October 30

Expedia, Inc. (EXPE)—This A-rated company is on the verge of acquiring Wotif.com, Australia’s biggest online booking site. The deal would vastly expand Expedia’s reach into Asia. The company is expected to report 21.7% annual earnings growth and 19.6% annual sales growth in the third quarter.

LinkedIn Corporation (LNKD)—The biggest question of the past few years is if LinkedIn could compete with Facebook and Twitter. So far, the company has struggled to keep pace. I’d avoid this D-rated company.

Up Next…

Now that we’ve covered Internet stocks, I think the most logical transition is to take a closer look at technology companies. For the past month or so, everyone has been talking about the latest iPhone rendition—whether it was excitement about the iPhone 6 or disappointment due to design flaws.

So will the new products in Apple’s line-up add to its bottom line—or will it be a flop? We’ll discuss Apple’s earnings in the next installment of the Market 360 earnings series, as well as take a closer look at other companies in the sector. So tune back in on Thursday, October 23.

Sincerely,

Louis Navellier

Louis Navellier

*Please note that earnings dates can change. All expected earnings dates mentioned are accurate as of the publishing date.

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