Internet Stocks: J.P. Morgan Cuts Ests On Stronger Buck; Also Lowers Outlook For Display Advertising Spending

Imran Khan, analyst at J.P. Morgan, this morning issued a pair of cautionary reports on the prospects for Internet stocks, one focused on weak ad spending, the other addressing the impact of a stronger U.S. dollar.

In his piece on the outlook for ad spending, Khan noted that macro weakness has already “spilled into the Internet sector,” but that “the weakness became more pronounced in Q3 and is spreading to international markets.” He thinks the biggest hit will be in display advertising. “As advertisers become more conservative with their ad spend, we think that the long-tail advertisers will shift toward performance-based advertising forms,” he says. Khan cut his forecast for 2008 U.S. display ads to $8.2 billion, from $8.6 billion, a reduction in expected growth to 14% from 20%. He reduced his ‘09 market estimate to $9.4 billion from $10 billion.

Khan sees a more modest hit to search advertising, offset by market share shift from display ads. He did trim his estimate on growth in U.S. search ads to 27% from 32% for this year. He is modeling 26% growth in 2009.

Khan contends weakness in international markets will be compounded by foreign exchange factors. He slashed his 2009 international search market growth rate forecast to 18% from 37%; for international display, his estimate drops to 16% from 19%. Put it all together, and he now sees 2008 global display ad growth of 16%, down from 22%, and search growth of 36%, down from 39%.

In a second research piece this morning, Khan tackled the impact of the rising dollar. His conclusion: “A rising dollar would take a bite out of Internet companies’ revenue & profitability.”

Put it all together, and it adds up to lower EPS estimates.

• For Amazon (AMZN), he cuts current year EPS to $1.50 from $1.51.


• For eBay (EBAY), he goes to $1.45, from $1.47 for this year, and to $1.71, from $1.77 for next year.


• For Google (GOOG), he now sees $17.05, down from $17.30 for this year; for next year his estimate drops to $21.63, from $22.31.


• For Orbitz (OWW), he now sees a loss of 25 cents a share, versus a loss of 24 cents. For next year his loss estimate widens to 26 cents from 22 cents.


• His Yahoo (YHOO) estimate remains a profit of 67 cents a share.


• For Expedia (EXPE), he goes to $1.14, from $1.15 for this year, and to $1.33 from $1.39 for next year.


• For Priceline (PCLN), he goes to $5.74, from $5.85 for this year, and to $7.10 from $7.54 for next year.