The primary metrics used to value Internet stocks are P/E, EV/EBITDA and P/FCF (see Exhibit 1 for a breakdown of valuations in the sector). The four largest Internet advertising stocks are trading at about 19x forward 12-month EPS and 6x next year’s expected EBITDA, compared with their five-year historical averages of 25x and 11x, respectively. Google currently trades at 10x consensus 2011 EBITDA, which is the low end of its three-year range of 10x-22x. The discounted valuations are likely a result of the stocks transitioning from rapid growth in the early stages of advertising share shift to the Internet to a more steady state of revenue and earnings expansion. Internet stocks have historically been valued on future earning, due in part to their relatively high earnings growth. The large Internet advertising stocks currently trade at a modest premium to the group’s five-year historical average of 32x.
Internet stocks are also valued as multiples of free cash flow. Google’s FCF has exhibited an impressive 44% CAGR during the past four years. On a P/FCF basis, Google and Yahoo trade at 22x (low end of historical range) and 41x (mid-point of historical range), respectively. Equity capital raised in the Internet sector has accelerated as companies and their investors seek to capitalize on improving equity markets and the growth of social media and e-commerce: at least nine Internet companies have raised more than $2.7 billion at ever increasing valuations since 2010.
The primary metrics for valuing large media stocks are P/E, EV/EBITDA and P/FCF. The large companies are currently trading at about 18x trailing 12-month EPS and 9.0x trailing EBITDA, which are in line with their four-year historical averages. The current valuation likely reflects the positive outlook for ad spending, offset by the longer-term threat to “traditional” media posed by the Internet. On a trailing P/FCF basis, the large, media stocks are trading at 16x, which is in line with their four-year average, but a discount to their 15-25% FCF growth. Most large media companies generate significant free cash flow (margin about 12% and yield 7-8%).
VIA.B, media entertainment producer, should see its EV/IC' increasing by approximately 2 points leveraging on increasing ROI', growing EPS, and sufficient growth.JCOM delivers cloud-based communication services at an extraordinary 66% ROI' which would imply a 4 points increase in EV/IC': the company has been beating earnings estimates and growing its revenues and profit for 5 consecutive years due to growing industry and international expansion.