Wall Street analysts are finding that many prominent Internet companies whose stocks have risen sharply in the last few months are now no longer worth the price.
In the last week, analysts lowered ratings on a wide range of Internet firms, including Amazon.com, Yahoo and Hotels.com. Researchers cited high share prices relative to earnings, underlying assets and prospects for growth as chief reasons for the downgrades.
The tempered outlook from Wall Street came on the heels of a resurgence in investor enthusiasm for the handful of well-known Internet stocks that survived the dot-com downturn.
"I think the Internet category has come back from the exile and unquestioning prejudice that the group has been subject to for the last couple of years," said Lanny Baker, an analyst at Salomon Smith Barney. Nonetheless, even a solid, profitable company can have a stock price that's too high.
Baker cited a lofty stock market valuation as his main reason for lowering Salomon's rating on Yahoo (YHOO) from "outperform" to "in-line" this week. Although he describes Yahoo's fundamentals as "great," he believes the stock would need to drop about 25 percent from its current price of just over $24 to be a compelling buy.
Baker wasn't alone in his apprehensions. Two other analysts, Jeetil Patel of Deutsche Securities and Gordon Hodge of Thomas Weisel Partners, also reduced ratings on Yahoo this week. But the downgrades didn't prevent Yahoo shares from surging on Wednesday and Thursday.
Similarly, recent downgrades didn't put a damper on Amazon.com's stock performance. In the past two weeks, both Baker and Heath Terry, an analyst at Credit Suisse First Boston, reduced ratings on Amazon (AMZN) after it exceeded their respective price targets of $26 and $25.
Still, shares of the online retailer rose Wednesday and continued their ascent Thursday, closing at $26.63.
In the case of Hotels.com, however, a downgrade by Legg Mason analyst Thomas Underwood prompted some more marked sell-offs.
On Wednesday, Underwood reduced his rating for Hotels.com (ROOM), a service for finding lodging online, from "hold" to "sell." In a report, the analyst said the stock is overvalued at current prices of well over $50 a share.
"We'd view (Hotels.com) shares more favorably at levels below $40 per share, all else being equal," he wrote.
Underwood said he believed many investors were mistakenly holding on to the stock in the hope that USA Interactive (USAI), which owns a controlling stake in Hotels.com, would purchase the rest of the company for a significant premium. But at current prices, Underwood believes it's unlikely USA Interactive will be willing to pay more than the going rate for Hotels.com shares.
Aside from concerns about soaring share prices, other Internet stocks were hit this week with downgrades tied to concerns about growth prospects and competition.
Shares of Overture Services (OVER), a provider of paid search-engine listings, took a dive on Wednesday and Thursday after Jordan Rohan, an analyst at SoundView Technology, reduced his price target on the stock from $20 to $6.
Rohan said Overture is likely to lose revenue because one of its main customers, Microsoft, is increasing investment in its own search technology.
Diminished expectations for growth also played into a decision by Nate Swanson, an analyst at ThinkEquity Partners, to downgrade shares of WebEx Communications from "equal weight" to "under weight" on Wednesday.
Swanson reduced his rating on the stock after WebEx, which provides a platform for holding meetings online, announced preliminary earnings for the first three months of the year that were slightly below Wall Street forecasts. The company said it planned to report revenues of approximately $42 million, over 40 percent higher than the same period last year, but about 3.5 percent below what analysts were expecting.
Although research firm Pacific Growth Equities upgraded WebEx (WEBX) following the announcement, Swanson said he believed the news was more negative than positive. Swanson found it peculiar that sales came in below forecasts this past quarter, given the fact that a tense political climate and lackluster economy are generally good for WebEx's business.
"Typically a bad economy, war, terrorism, people traveling less has always been a contrary indicator to their business," Swanson said. "If you're traveling less, you're probably going to use their service more."
