Analyst: How to Pick a Top Internet and Entertainment Stock in 2014

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If you ask Needham & Co. analyst Laura Martin, there are two companies in the Internet and entertainment sectors that stand out as potential winners in 2014: Pandora Media (NYSE:P) and Scripps Networks Interactive (NYSE:SNI). StreetInsider reports that Martin has chosen these two stocks as top Internet and entertainment picks for the upcoming year. Let’s look at them one at a time.

Martin has a Buy rating on Pandora with a price target of $33, which was set just ahead of the company’s November 21 earnings report. Although the stock saw some selling pressure following the report, the news was generally good, and even analysts with a Neutral rating on the stock – like Michael Pachter from Wedbush Securities – who were underwhelmed by the outlook agree that the core business is growing.

Martin argues that the biggest driver for Pandora in 2014 will be mobile and whether the company can monetize it. In a note seen by StreetInsider, Martin writes: “The premium afforded to solving the ‘mobile monetization puzzle’ is well deserved, in our view, because the ability to monetize on mobile devices raises the option value on global revenue streams, since much of the world’s access to the internet is via smartphones. Global revenue stream optionality elongates the visible revenue growth trajectory of a company, and raises the ultimate payout potential of the option.”

Martin reiterated her Buy rating on Scripps Networks on December 16 and set a fresh price target of $100 per share. Martin believes that Scripps is ripe for takeover “owing to its small size, high quality cable networks (Food, Travel, Home & Garden), untapped international expansion, and affiliate fee upside.”

Martin is an analyst who focuses on media companies, and within that, she has a focus on content. Her coverage list includes companies like AOL (NYSE:AOL), CBS (NYSE:CBS), and Yahoo (NASDAQ:YHOO), all of which she has singled out in past years as potential winners and which went on to perform more or less as she predicted.

No analyst is prescient, but Martin’s insight into the Internet and entertainment industry has helped her construct a compelling case. There is nothing radical or surprising about her analysis: simply confidence in how the companies, the industry, and the market will move forward in a fairly logical progression. Mobile is challenge that many companies face, and those have done the job and successfully monetized it — like Facebook (NASDAQ:FB), which Martin covers — have reaped the rewards of increased valuation.

The case for acquisition is a little more hit or miss, but Scripps hardly appears set up to fail if it is not bought. As Martin points out, much of the same upside potential that makes Scripps an attractive acquisition target also makes it a good business.

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