Yelp, Angie's List Seen As Most Likely Acquisition Candidates In SMID-Cap Internet

Blake Harper of Topeka Capital Markets reviewed the small-mid cap Internet sector, noting that consolidation in the space is "likely to continue."

• Harper suggested that potential acquisition targets include companies with mobile user bases, unique assets, and marketplaces with large addressable markets.
• The analyst named Yelp Inc YELP and Angie's List Inc ANGI as being "the most likely companies to be acquired."

Paul Vogel of Barclays commented in a note earlier in the week that investors should continue favoring some of the large-cap Internet names.

But what about investors looking for opportunity within the small and mid-cap names?

Blake Harper of Topeka Capital Markets published a research report on Thursday that covered the small and mid-cap Internet space. According to the analyst, average valuation multiples for the Internet peer group are now 3.8x EV/Sales, 18.3x EV/EBITDA, and 32.6x P/E (based on next year's estimates). While the valuation levels for many small-mid cap names "become more attractive" in the quarter, they are still "slightly lower" than the average peer multiples at the same time last year.

"Increasing competition from larger Internet companies and from venture capital backed private companies, as well as FX headwinds, led many companies to reduce, or left them unable to raise, 2015 full year revenue guidance," Harper explained in his note.

"Deleveraging of adjusted EBITDA margins occurred in over half of our coverage universe in 2015 due to higher investments in people, product and marketing."

What Stocks To Buy?

According to Harper, consolidation within the small-mid cap space will continue. Potential acquisition targets are companies that have three unique qualities: 1) mobile user bases, 2) unique assets (especially local business information, picture and video content and reviews), and 3) a marketplace with a large total addressable markets.

Harper named Yelp and Angie's List as best suited to fit the category. The analyst added that the companies could benefit from "being part of a larger platform" given "necessary future investments" in products and marketing in order to expand and scale the business -– especially internationally.

On the other hand, companies with mobile audience growth and improving mobile monetization should "continue to be the companies to own."

In this case, the analyst listed his top four ideas as: 1) RetailMeNot Inc SALE, 2) Twitter Inc TWTR, 3) Lendingtree Inc TREE and 4) Bankrate Inc RATE.