Internet Stocks: Heading To Bubble V 2.0?

Internet stock bubble

The 1999 internet stock bubble ended in bad memories for a number of Internet investors. So what was it back then? Insane valuations of tech IPO’s and exorbitant prices paid for ‘Ideas’ rather than sound business models. 2013 has been a year which has given huge returns to investors in the internet sector. The Nasdaq QNET, which is a representative index of the internet stocks, has seen a year-to-date (YTD) gain of 55% in 2013 (as of Nov 13 closing price). While 54% gains in less than a year are whopping gains, as an investor it would be prudent to see what has fueled the gains. Are these gains based on strong fundamentals or are we heading to dotcom bubble v2.0? The table below shows the year-to-date (YTD) growth in QNET aggregate earnings and aggregate sales along with the QNET YTD price change.

QNET YTD Performance - Jan 1, 2013 to Nov 13, 2013

Price change 54.33%
QNET stocks aggregate earnings growth -1.31%
QNET stocks aggregate sales growth 19.97%

The QNET consists of 81 component stocks and we carried out a research based on the changes in sales, earnings and price changes of the component stocks vis-à-vis the QNET. The QNET registered huge price gains in-spite of a 1.31% fall in the aggregate earnings. While the sales did grow by close to 20% in the year to date, the sales increase did not result in greater earnings, which is the essence of stock price gains resulting in wealth creation.

The steep rise in the internet index has been fueled by some stocks registering sky high gains in-spite of no significant change in the fundamentals. The table below lists some of the highest price gainers among the QNET components and their year to date growth in revenues and sales.

Ticker YTD Revenue Growth YTD Earnings Growth YTD Price Growth Complete Stock Analysis
NFLX 20.09 590.93 262.12 Netflix stock analysis
UNTD -1.24 -230.14 230.41
Z 68.69 -391.97 197.51 Zillow stock analysis
WBMD 9.46 -130.15 180.89 WebMD stock analysis
MKTG 26.67 -121.65 176.51
OWW 10.27 1139.26 169.49 Orbitz stock analysis
MOVE 16.42 -87.38 121.40 Move stock analysis
GRPN 6.43 -203.14 111.93 Groupon stock analysis

* All values expresses as %

The table above shows a clear picture of the risk involved in investing in the mentioned companies at their current valuations. It would be worth mentioning that though Orbitz worldwide (NYSE:OWW) appears to have grown its earnings substantially, the huge earnings growth is due to meager earnings during the same period in 2012. The current Net Income margin of the company at 24% is significantly lower than 30%-35% of industry leader Priceline (NASDAQ:PCLN). One could argue that Orbitz is headed in the right direction, but at the current price levels the stock is expensive. The current LTM earnings-per-share (EPS), using earnings before non-recurring items, of 38.6 make the stock an expensive bet. Another fact to consider is that improving profit margins from the current level of 22% - 25% will be a far tougher task for the management, making the stock that much more riskier.

Fundamentally strong stocks

Ticker YTD Revenue Growth YTD Earnings Growth YTD Price Growth Complete Stock Analysis
SPRT 19.97 NA 7.19
FB 318.94 NA 82.98 Facebook stock analysis
IACI 12.91 76.22 21.57 IACI stock analysis
NILE 15.21 71.47 15.10 Blue Nile stock analysis
AKAM 14.64 57.07 13.74 Akamai stock analysis
EBAY 14.27 7.91 3.98 Ebay stock analysis
EQIX 12.86 39.88 -23.46 Equinix stock analysis
VOCS 12.77 10.07 -48.62 Vocus stock analysis

* All values expresses as %

The above companies have seen a positive movement in fundamentals which hasn't been accompanied by similar price movements. (NASDAQ:SPRT) and Facebook (NASDAQ:FB) have seen huge improvements. However calculating the earnings growth on a negative base would present a wrong picture of the company. We therefore would like to measure the two companies based on their sales increase, even though the improvement in their profit margins has been tremendous. has registered a 5th consecutive quarter of profitability, a record of sorts for the small company. The financial performance of Facebook has been more than satisfactory with the company having solved the puzzle of leveraging its mobile user base in Q2 2013. The other notable companies in the list are EBay Inc. (NASDAQ:EBAY), Akamai Technologies (NASDAQ:AKAM) and InterActiveCorp (NASDAQ:IACI) which have seen significant improvement in fundamentals and are currently trading at valuation multiples which are attractive compared to peers.

The stable stocks

Ticker YTD Revenue Growth YTD Earnings Growth YTD Price Growth Complete Stock Analysis
AWAY 22.68 84.74 58.41 Homeaway stock analysis
PCLN 29.04 33.93 81.21 Priceline stock analysis
CSGP 30.21 225.58 97.14 CoStar stock analysis
YNDX 32.94 77.41 72.19 Yandex stock analysis
GOOG 16.25 21.56 45.96 Google stock analysis

* All values expresses as %

While we have clearly highlighted the overpriced internet stocks from the relatively undervalued stocks, the table above lists stocks which have seen significant positive movement in their fundamentals accompanied by significant price gains. However CoStar group Inc. (NASDAQ:CSGP) and HomeAway Inc. (NASDAQ:AWAY) are highly expensive at their current LTM price to earnings ratio (PE multiple) in excess of 150.


The QNET price movement and change in the sales and earnings suggest we may be heading towards a huge peak which only ends in a fall down the cliff. While there might be a price fall ahead, there isn't a shortage of good investment options among the internet stocks. Hence in this time of uncertainty, when we may be heading to version 2 of internet stock bubble, the decision of stock picking will assume significantly greater importance. It’s here we at Amigobulls bring to you independently researched articles and thoroughly screened stock picks from the internet industry. Click here to see our top stock picks from the internet industry.

Virendra Singh Chauhan Virendra Singh Chauhan   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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Comments on this article and NFLX stock

Yes there is definitely a bubble in many of these dot com stocks. Even the ones like FB that you say as fundamentally strong are not financially strong.
It will be a while before FB and Homeaway can be called financially strong.
Do share this awesome post