Citi's Internet Shopping List

Citi analysts are largely bullish on Internet stocks, eyeing future growth amid an influx of more tech-savvy consumers and greater access to high-speed mobile data.

Analysts at the bank, which initiated coverage of the Internet sector this week, said in a research note sent to clients that the industry is still in the “early innings of its growth cycle.”

Internet-centric consumers, mainly from the Millennial generation, are just starting to enter their “prime buying and influence period,” they added, while the shift in Internet consumption from PCs to mobile devices represents a key growth driver for the industry.

With those factors in mind, Citi unveiled its top five web stocks, five others it rated at neutral and one more that analysts consider to be on the way down, listed in order of preference.

1. Google

According to Citi, the Internet search giant has the best combination of growth, price and long-term confidence. Google holds a “strong competitive position across most key secular growth segments of the Internet sector,” the analysts wrote.

Rating: Buy

Price target: $1,100

2. Amazon

Citi called e-commerce giant Amazon.com and Google “the most consistently innovative and disruptive companies” in this space. Investors may be underestimating Amazon’s growth prospects in the cloud arena, analysts noted.

Rating: Buy

Price target: $340

3. Yahoo!

Yahoo! is one of the best risk/reward names, Citi said. There are several ways investors can win, such as near-term catalysts like the Alibaba IPO and just a modest improvement in core fundamentals.

Rating: Buy

Price target: $30 ($35 upside, $25 downside)

4. eBay

EBay is well-positioned for the “secular convergence of online/offline retail” and for the growth of mobile commerce, Citi said. PayPal is driving value for the stock and might be the biggest upside opportunity, especially if its offline initiative takes hold. Analysts believe the market is ascribing no value for PayPal’s offline prospects, saying its price target leaves room for an additional $4 a share if offline market share gains are realized.

Rating: Buy

Price target: $65

5. AOL

“CEO Tim Armstrong has done a good job, but you need and fortunately are being paid to be patient,” the analysts wrote, citing AOL’s 7% yield. Citi believes AOL will hit its price target if the company can sustain its first-quarter acceleration in brand news and continue to rationalize losses.

Rating: Buy

Price target: $43

6. Netflix

Netflix tops Citi’s group of neutral stocks. Analysts are bullish on the subscription service for movies and television shows, but the stock could trade sideways until a positive catalyst is near, something that is more than 12 months away. The stock has already surpassed Citi’s initial price target, but another $34-a-share gain is in order for every 5% increase in domestic average revenue per user.

Rating: Neutral

Price target: $233

7. LinkedIn

Citi called professional social network LinkedIn a great company but one that is trading at a premium price. Investors are taking into account more upside for new or future revenue streams than analysts are “comfortable assuming today.” Keep an eye out for signs of user engagement acceleration and the News Feed advertising initiative before turning bullish on the stock, unless shares fall closer to $160.

Rating: Neutral

Price target: N/A

8. Facebook

The desktop to mobile transition is creating some uncertainty around Facebook, particularly when it comes to second-half numbers this year. Other near-term risks include changes to ad products and a redesigned news feed. While there’s a lot of upside to the Facebook’s valuable user data, Citi analysts said it’s hard to take a side on the social network until they can get comfortable with second-half and calendar-year 2014 numbers.

Rating: Neutral

Price target: $27

9. Yelp

Citi is generally bullish on the value of reviews and recommendations in e-commerce and on Yelp’s ability to sustain growth of at least 20%. Although analysts see no known downside, current prices factor in more upside to earnings compared to Citi’s view.

Rating: Neutral

Price target: $35

10. Zillow

Here’s another stock that Citi feels bullish about but is waiting for a buying opportunity. Analysts believe real estate site Zillow may trade sideways during the current investment cycle that includes more brand marketing, while operating margin for 2013 is forecasted to come in at half of last year’s results.

Rating: Neutral

Price target: N/A

11. OpenTable

OpenTable, a restaurant reservation platform, is the lone Internet stock that Citi recommends selling. Analysts called it a good business with high margins, but its current valuation doesn’t reflect what Citi estimates to be an already high penetration of the service in Tier 1 market restaurants. Citi expects growth to decelerate from a recent rate of between 15% and 20% to a rate of 10% to 15% over the next two to three years.

Rating: Sell

Price target: $58