Week In Review: AOL, Google, Yahoo

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Internet stocks traded down for the week, in conjunction with the broader market, which has been more volatile. As a result, the NASDAQ Internet Index (NASDAQ:QNET) is giving back some of this year’s advances, as investors capture gains on some of their best performing shares. In this report, we discuss some of the key events from the past week for America Online (NASDAQ:AOL), Google (NASDAQ:GOOG) and Yahoo (NASDAQ:YHOO).

AOL

America Online (NASDAQ:AOL) has been focusing on its content and ad business in order to reduce its dependence on the internet subscription and content business. During the week, the company’s stocks outperformed the market as it traded steadily in the $42-$44 range. The company reiterated its commitment to video content as it hired ex-Viacom excutive Dermot McCormack to head its video and studio. [1] Earlier in the week, AOL extended video and additional news stories from popular sites such as the Huffington Post and TechCrunch to Microsoft MSN. The arrangement builds upon a partnership that AOL Inc. and Microsoft Corp. struck in April this year, and will help the company in selling more digital ads. We believe that AOL is well positioned to capture share in the growing video online ads in the U.S. in coming years.  Our valuation of $38.52 per share (market cap of$3 billion) for the company is 9% lower than the current market price of $42 per share (market cap of $3.4 billion). We expect AOL to report revenue of around $2.38 billion and net income of $220 million for 2014. We forecast non-GAAP diluted EPS of $2.82, which is inline with the market consensus of $2.83 (Reuters).

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Google

During the week, Google announced launch of a slew of features and apps to improve user experience across both PCs and mobiles. While the new Hangouts Chrome App for Chrome OS and Windows PCs will help improve a user’s communication experience, a new feature in Google Now will help mobile users monitor their bills. For the week, Google’s stock declined by 5%, inline with the market selloff. Our valuation of $544 (market cap of $335 billion) for the company is 3% lower than the current market price (market cap of $346 billion). We expect Google to report revenue of around $53 billion and net income of $15.7 billion for 2014. We forecast non-GAAP diluted EPS of $19.41, which is below the market consensus.

Yahoo

Yahoo’s stock outperformed the market as it traded steadily in the $40-$41 range, despite a sell off in broader market indices. During the week, Yahoo acquired MessageMe for $12 million and is reportedly close to investing in Snapchat Inc. in a funding round that values the startup at $10 billion. Currently, we value Yahoo at $41.53 per share (market cap of $41.9 billion), which is in line with the current market price (market cap of $41 billion). We expect Yahoo to report revenue of around $4.46 billion and net income of $430 million for 2014. We forecast non-GAAP diluted EPS of $1.32, which is slightly below the market consensus of 1.41 (Reuters).

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Notes:
  1. Dermot McCormack Takes Over AOL Video & Studios As Ran Harnevo Departs, October 7 2014 []