Time for a pause
Australian online media stocks delivered outstanding returns in FY18, with the big three stocks by market capital delivering 27% capital appreciation on average. Having outperformed the overall market by a wide margin, the online media sector may be heading for a pause, or perhaps a temporary retracement of part of FY18's vertiginous ascent.
Priced for perfection
Morgans clients can log in to view the stocks priced for perfection. For each stock the market has built in heady expectations of another year of strong double-digit revenue growth. Small cuts to FY19 growth expectations during the results season could trigger stock price corrections of 5% to 10% for each name. But as the long-run trend for online media still appears sound, we would see any major pull-back as an opportunity. Of the large cap online media stocks, only CAR seems to have low expectations and thus low risk of disappointment.
Small caps still unfavoured
Small caps in the online media sector remain unloved, for the most part, and trade well below our valuation (Morgans clients can log in to view our valuations and share price target). With expectations low, and results already well-flagged, we see little risk of negative surprise in any of these names.
Long-run themes still intact - but costs an issue
In the main the long-run themes have made the sector a stunning out-performer over the past 15 years remain intact. Advertising dollars and (increasingly) transactions continue to migrate from the old media world to the online world. However the pace of migration of traditional media revenues to the online market will inevitably slow from now.
The challenge for the established marketplace leaders is to keep innovating and re-investing in the business, building new revenue streams (transactions) that were not possible on the old media world. Online businesses that stand still for five minutes could be bulldozed. The need for continuous investment often results in disappointment in reporting season as operational leverage is less than some observers imagine is possible.
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Disclaimer(s): Analyst owns shares.
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