Internet Stocks Downgraded By Morgan Stanley, Citing Overvaluation

The internet stocks have been downgraded by Morgan Stanley from  ‘attractive’ to ‘in-line’ citing that current growth levels does not justify the valuations, says a report from Reuters.

“Outperformance has been driven by multiple expansion rather than positive estimate revisions,” Morgan Stanley told. “Consequently, we believe current valuations could be full despite strong secular trends.”

Internet firms have high valuations

According to Thomson Reuter’s data, in last one year, Facebook Inc (FB) and LinkedIn Corp (LNKD) share prices have more than doubled and are trading at 44 and 97 times of their forward earnings. For the same period, Google Inc (GOOG), whose share price has increased by 56%, is trading at 20 times the forward earnings.

Analysts noted that Morgan Stanley projections for the earnings before interest, tax, depreciation and amortization, for the year 2014, have seen a jump by 1% to 2% in the current year, whereas the value of internet companies has risen by 57%.

Factors driving internet firms

Morgan Stanley analysts are of view that the investor’s preference for the total addressable market (TAM) and less of risk has resulted in such high valuation on internet stocks.

Analysts cited a report “”There may not be enough TAM for all of our companies to achieve long-term estimates.”

Investors are betting on the sector thinking that the companies will have a bigger opportunity to grow as they tap the technology driven youngsters who spend more on cars, houses and other expensive things. The business and revenues for such internet companies will see a rise as these customers do the majority of search and spending over the internet.

Individually, stocks look good

Morgan Stanley dropped Google from its list of the best idea citing that the catalysts have been already been accounted for.

Despite this, Morgan Stanley reiterated “overweight” rating to companies like Google (GOOG), ebay Inc (EBAY), (AMZN), LinkedIn (LNKD), Facebook (FB), Incorporated (PCLN).

“While we still believe that our Overweight-rated stocks hold upside, we find overall valuation for the entire group to be unflattering,” says the report from Morgan Stanley.

Morgan Stanley feels the share prices for companies like Zynga Inc (ZNGA), WebMD Health Corp. (WBMD), and OpenTable, Inc. (OPEN) will come down.