Bottom Isn't In For Internet Stocks Yet, But Buy These 4 Names Now

With earnings season for Internet stocks set to kick off soon, Pacific Crest analyst Evan Wilson recently took a look at what investors can expect this earnings season and which stocks investors should be buying before the numbers come out.

While Internet stocks may be past their cyclical peak, there are still plenty of buying opportunities out there.

Post-Peak

According to Wilson, Internet stocks reached the peak of their current cycle back in March 2014. Since then, he sees performance as “a disaster.” The result has been an investor base that is extremely jittery and overly cautious. He uses the ad-blocking scare as one example of this type of behavior.

“The clear driver is still the big slowdown in Internet user growth, which has caused companies to sacrifice margins (nearly every company has lower 2015 EBITDA margins versus 2014) by accelerating acquisitions and advertising spending,” Wilson explained.

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Not Calling A Bottom

While Pacific Crest has seen signs that Silicon Valley is beginning to modify its behavior to adapt to the new environment, Wilson stated that he needs to see more action before calling a bottom in the industry. So far, Internet companies have dialed back the dilutive acquisitions and fundraising and have even begun making layoffs.

However, he is looking for cuts to marketing budgets as well and believes that 2016 EBITDA margin estimates likely remain too high.

Stock Picks

Pacific Crest predicts that “choppy” earnings will continue this season for many Internet names.

The firm names Alphabet Inc GOOGL GOOG, LinkedIn Corp LNKD, Criteo SA (ADR) CRTO and HomeAway, Inc. AWAY as its top four names to buy ahead of earnings.

Disclosure: The author holds no position in the stocks mentioned.

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