RBC’s Smaller Internet Stocks to Buy With Big Upside Potential

Lee Jackson

When most investors think of Internet stocks, the first ones that usually come to mind are the industry giants like Google, Yahoo and Facebook. The reality is there is a world of top Internet stocks that, while they lack mega-cap status, are extremely successful at making money and could always end up as a target for the big boys.

A new research report from the Internet team at RBC indicates that current expectations for the smaller Internet stocks in their coverage universe are biased toward the positive side going into the earnings for the quarter. The group has outperformed the S&P 500, rising anywhere from 8% to 10% versus the index gain of 4%.

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We screened the RBC report for the three top picks, and for additional Internet stocks with the least amount of risk from second quarter earnings expectations.

Zulily Inc. (ZU) is one of the top three picks from the RBC team. They believe that the recent stock underperformance creates a very attractive entry point for investors and continued expansion beyond core children's apparel segment implies proven value to vendor partners. Their survey results highlight the company's leadership position as a flash-sales website with high customer satisfaction with price, customer selection and discovery viewed as company's best features.

The RBC price target for Zulily stock, which is rated Outperform, is $50. The Thomson/First Call consensus price target is at $48.86. The stock closed Tuesday at $37.42 a share.

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Shutterstock Inc. (SSTK) is one of the stocks RBC believes holds less risk in front of earnings and is a top pick. The company is the undisputed leader for online commercial digital imagery. It is the "you name it, we have it" one-stop shop for any commercial or personal image or video need. The company offers its products for users to enhance their visual communications, such as websites, digital and print marketing materials, corporate communications, books, publications and video content.

The RBC team is impressed with the company's ability to take advantage of what they see is a secular movement of imagery and photography online. With the additions of added salesforce, new products, expansion and acquisitions all designed to help growth, and partnerships with Facebook and Salesforce.com, the stock could be poised for big growth. The stock is rated Outperform, and the RBC price objective is a big $90. The consensus target is $89.20. Shares closed Tuesday at $76.11.

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Bankrate Inc. (RATE) has underperformed despite fundamentals the RBC analysts see as coming around. One overhang has been the departure of the company's CEO, which should fade with time. The new products and offering from the company, which include Mobile, MyBankRate, Data analytics and Caring.com, could add significantly to earnings in the second half of the year and in 2015. The stock is another one of the top picks and is rated Outperform at RBC with a $21 price target. The consensus figure is set at $21.22. The stock close Tuesday at $17.49.

Orbitz Worldwide Inc. (OWW) is one of the names that the RBC team sees very little front-end risk in as it already pre-announced positive earnings numbers. While Orbitz no longer has an exclusive relationship with Kayak, which rival Priceline.com recently bought, to help drive results, the company is benefiting from a large uptick in online spending in the travel industry. Orbitz is rated Sector Perform with a $10 target. The consensus target is $9.10, and shares closed Tuesday at $9.01.

Shutterfly Inc. (SFLY) has secured a quality niche in the Internet landscape for photos and is another stock the RBC team feels is a low-risk company is front of earnings; it reports after the close on July 30. Many Wall Street analysts have cited the firm's positive thesis citing growth opportunities, its e-commerce model, quality products and culture of innovation.

The RBC analysts expect Shutterfly to continue to invest in long-term growth opportunities and adjacencies such as enterprise printing and mobile/cloud-based photo sharing. RBC rates the stock Outperform and has a $60 price target. The consensus target is $54.25. Shares close Tuesday at $47.47.

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While many investors like the comfort and security of the mega-cap Internet leaders, much of the growth in some of the top stocks may have been already priced well in. Some of these smaller stocks with big market presence may be good additions to aggressive growth portfolios with a high risk tolerance.

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