Internet Growth Trio

03/14/2014 8:00 am EST


Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

Growth stock expert Mike Cintolo highlights a trio of leading players in their online space. Here’s the latest from his Cabot Market Letter.

Facebook (FB)

Facebook’s stunning $19 billion purchase of WhatsApp grabbed the headlines for a week or two. It’s hard to defend the purchase price.

However, given WhatsApp’s gigantic user base (nearing 500 million, most of whom use the messaging service every day to the tune of 19 billion messages sent each day!), and its plan to introduce live voice calling this year, and the potential is there.

More important are Facebook’s traditional advertising efforts, which, according to executives at firms like Coca-Cola and American Express, are generating ever-higher returns for advertisers. The stock’s recent pause looks like a good buying opportunity.

HomeAway (AWAY)

It’s not as sexy as some other stories, but we believe HomeAway has all of the characteristics of a big winner—it serves a mass market, it offers a major benefit to consumers, it dominates its market.

The company has about five times more traffic than its nearest Web competitor and, numbers-wise, sports-accelerating revenue growth (21%, 23%, and 26%, the past three quarters) and strong cash flow (about $1 per share, much higher than earnings).

The stock can be choppy, but its earnings-induced move to new all-time highs last week was bullish, and the recent consolidation presents a solid entry point. Go ahead and buy some if you don’t own any.

Yelp (YELP)

Institutional investors (who need months to build and unload large positions in stocks) yearn for firms that are growing rapidly, but also have a high degree of predictability in that growth. We feel Yelp is one of those.

It’s the hands-down leader in local advertising, connecting millions of consumers with local businesses. And what’s always intrigued us is that Yelp’s growth, in most of the cities it enters, plays out similarly each time.

Considering the company’s six oldest cities (entered in 2005-2006) are still growing local ad revenues at 62%(!), there’s no reason to think Yelp doesn’t have many years of fast growth to come.

Total revenue growth is still accelerating (up 72% last quarter), and the stock, while it’s had a big run, has been acting well since gapping up on earnings last month. You can expect volatility, but we’re buying in here.

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