Global financial firm Morgan Stanley downgraded its outlook on Internet stocks from "attractive" to "in-line." This means that while the stocks for companies such as Google, Facebook, and Amazon performed well this year and Twitter kicked off its IPO with a bang, the stocks are headed for a correction.
Twitter has nearly doubled its price per share roughly a week after its IPO. The stocks of Google, Facebook, and Amazon are up by as much as 57 percent while the Composite Index of Nasdaq shows a gain of 28 percent. The team from Morgan Stanley also removed Google from its Best Idea list saying that the influencing factors making the stock attractive have played out.
Morgan Stanley released a new note to investors Monday drawing a picture of the possible fall of Internet stocks. The team headed by analyst Scott Devitt, known for his cautious approach to the bulls when it comes to Internet stocks, warned of the overpriced stocks and their possible cooldown.
"We see a more balanced risk-reward following strong performance. Outperformance has been driven by multiple expansion rather than positive estimate revisions. Consequently, we believe current valuations could be full despite strong secular trends," the note of Devitt and colleagues stated.
The team of analysts foresee investors to be selling their Internet stocks by early 2014 as they realize that the expectation for the companies are too high. The gist is that it is not a good time to buy now while it is also not the right time to sell.
"We believe that growth needs to accelerate to justify recent performance, the absence of which could lead the group multiple to revert to the mean," the Morgan Stanley note said.
"Our 2014 EBITDA estimates have increased 1-2% YTD while group enterprise value has increased 57% YTD. This can be explained by a 40% expansion in our coverage EV / Forward 2-year EBITDA multiple to 14x. We believe multiple expansion has been a consequence of investors sponsoring a growing number of stocks on the basis of a significant TAM opportunity justified by a relative valuation approach with minimal focus on risks. In our view, there may not be enough TAM for all of our companies to achieve long-term estimates and we believe we could see a return to a more valuation-sensitive investment process as the fallacy of a broadening TAM approach to investing becomes more evident to the market," the note to investors explained.
TAM is the "total addressable market" and to the Internet sector and its current situation. Investors might have expected a bigger market for the said companies with consumers of products and services anticipated to spend more. However, this will not be the case as the early part of 2014 will be more valuation sensitive as the market corrects itself.