Piper’s Safa Rashtchy, who gets credit for being an early and avid Wall St. supporter of the paid search market, today released his firm’s outlook for what might be called the “internet economy” sector, and it’s pretty rosy. Note in particular “In our opinion, all of this clearly indicates that fears of a bubble-type valuation are unfounded.”
1. We expect average revenue growth of more than 23% and an EBITDA growth of at least 37%, resulting from margin expansion in nearly all of the companies under our coverage. We also believe that these estimates are mostly on the conservative side and have strong probability of upward revision.
2. With a 37% average EBITDA growth, the coverage companies are trading on an average enterprise value to EBITDA multiple of just over 18x, suggesting a growth multiple of less than 0.5. Similarly, the GAAP ESP, while not as a good and clean a measure of valuation as EBITDA, is still at PEG of 1.0. In our opinion, all of this clearly indicates that fears of a bubble-type valuation are unfounded. The stocks are not heavily undervalued but there is room for multiple expansion and, of course, estimate revisions that can support higher prices.
3. The universe-wide look at the 2005 growth projections underscore the value of our top picks, in particular United Online, trading at 6.8x ’05 EBITDA, a 60% discount to the universe and DoubleClick, trading at 10.3x ’05 EBITDA, a 44% discount to the universe. While the EBITDA growth rates for these two are slower than the 37% average, even growth adjusted multiple for these two companies will be substantially higher than their current valuation. We also believe that our estimates for our other top picks, Yahoo and SINA, are very conservative with a strong upside potential justifying a much higher multiple than current valuation.