4 Top Internet Stock Picks From J.P. Morgan

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A few days ago I read a few articles that started off by saying, “J.P. Morgan names Facebook, eBay, Priceline and Pandora as its top picks among Internet stocks for 2013.”  That was followed by a link to read more. 

I was initially a little perplexed – so much so that I clicked on the link so that I could understand J.P. Morgan’s rationale for selecting these as top picks.

Facebook (NASDAQ: FB)

According to the article, Facebook was named the “top large-cap pick” for 2013 by J.P. Morgan.  Admittedly, over the past 3 months Facebook has had a nice run, rising by more than 50%.  As the disclaimers in investment prospectus love to say, however, past performance is not indicative of future performance.  But what I found even more confounding was that the price target was set at $35 – which is a mere 12% more than Facebook is trading at today.  My question: How could a stock with a considerable amount of risk and fairly limited expected upside be the “top large-cap pick”?  According to analyst Doug Anmuth, “we believe it is still very early in Facebook’s mobile advertising trajectory, and marketer feedback on mobile and News Feed ads is now more positive.”


The next stock that article highlighted was eBay – a stock that was up some 60% at the end of 2012.  According to J.P. Morgan’s Anmuth, growth in eBay’s core business “could accelerate over the next couple quarters as eBay continues to benefit from strong user growth, increased inventory from large retailers, mobile, and improved site design.”  Ok, I’ll buy that.  But again I have the same issue: his target price is only 5% above the stock’s current price.  Sure, I love eBay’s business model and long term growth potential, but price matters and at over $50 a share eBay doesn’t look all that attractive, particularly given that earnings are down.

Priceline (NASDAQ: PCLN)

Then there is Priceline.  Admittedly, I like the Priceline Negotiator feature on the website.  From my perspective, however, the problem is that there are a gazillion companies like Priceline: Hotwire, CheapAir, CheapOair, Kayak, Travelocity, Orbitz, Expedia, and TripAdvisor to name a few.  So unlike an eBay where there are few legitimate competitors, Priceline has a ton.  Of this group of stocks, I feel that TripAdvisor is the best bet.  Again, I have the same concern: the $740 price target is only about 13% above the stock’s current price.  That seems like a lot of risk to assume for a 13% upside.  According to Anmuth, the online travel site could see “strong international bookings growth” in 2013 “as the company steps up investment and benefits from a somewhat more stable macro environment.”

Pandora (NYSE: P)

The final stock was Pandora Media, which was designated as “the top small-cap pick.”  Of all of the stocks recommended, based on the target price of $14 this stock has the most upside potential: 27%.  The rationale appeared to be that Pandora is well-positioned to gain market share and once it does that Pandora can then improve its margins. 

3 Factors to Consider

  1. Conflicts of Interest.  Does the author have any conflicts of interest?  Does either he or J.P. Morgan benefit by recommending any of these stocks?      
  2. Investor’s Willingness to Pay.  At the end of the day a stock price is determined by the last price that somebody paid.  Internet companies are very difficult to value and investors are not always rationale.                
  3. Growth Potential.  Many internet companies have tremendous growth potential that is difficult to forecast and quantify.  

My Foolish Take

Of the companies mentioned above, eBay is the only company that I feel has a business model that justifies its current valuation.  Overall, given their current valuations I feel that these companies offer limited upside potential over the next year with considerable risk.  That is why I would either rather place a bet somewhere else or wait for a significant pullback and then buy. 

RyanPeckyno has no position in any stocks mentioned. The Motley Fool recommends eBay, Facebook, and Priceline.com. The Motley Fool owns shares of eBay, Facebook, and Priceline.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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