Thursday, December 9, 2010

Internet Sector Overview from Mark Mahaney at Citi

I had the chance to hear Mark Mahaney from Citigroup yesterday. Mark follows the Internet space for Citi and, in my opinion, is one the best in the group. Mark has been following the internet space for more than a decade, which makes him a true veteran in an area that has really only been around since the mid-1990's.

One of the tough parts of following Internet companies is that traditional valuation method are for the most part fairly useless. Stocks move on news flow and momentum - buy-and-hold might work for some sectors, but the internet space is not one of them.

For example, one of the best performing stocks this year in Mark's coverage universe has been OpenTable (ticker: OPEN) which provides consumers an online method of securing dining reservations either through their PC or their mobile phone.

OPEN is up almost +200% YTD (!) as the market has recognized the company's incredible growth rates; Mark noted that almost 30% of the restaurants in the United States now are part of OPEN's network. Still, buying OPEN today (which Mark continues to recommend) means buying a stock trading a 114x 2011 earnings estimates, which obviously means that it is not for the faint of heart.

I won't go through all of Mark's thoughts, but I wanted to share his thoughts on Google (GOOG).

GOOG remains one of Mark's favored stocks, despite the fact that it is now a pretty big company (I think they employ something like 23,000 people). There have also been rumors that some of their best engineering talent has been leaving to go to smaller, more nimble competitors like Facebook.

Mark's buy on GOOG is based largely on the opportunities the company has in the mobile internet space i.e., smartphones. While other parts of GOOG's business is experiencing reasonably strong growth (e.g. personal computer search, which currently represents 85% of GOOG's revenues, is growing at +30% per year), mobile search revenues are literally doubling every year. Mobile internet now produces $1 billion of revenue for GOOG, but Mark feels they are only beginning to add useful consumer applications in this area.

Mark's eventual price target on GOOG is over $700 per share (the stock is trading around $590 right now). When I pressed him on how he could believe a large cap stock that is widely followed like GOOG could be 20% or so undervalued, he went through his methodology which to me at least sounded like it was pretty reasonable.