When the going gets tough, even the tough can get a beating. The latest example is Goldman Sachs’s downgrade of four top internet stocks from Neutral to Sell.

Each of the companies has been around for 25 years or more but that longevity no longer appeals to Goldman’s analysts if the company’s valuation is based on revenue multiples. Those go-go days are in the rear-view mirror. Going forward, valuation is going to be driven by profits.

Here’s how Eric Sheridan and his team put it:

Since Oct ‘21, our coverage universe has de-rated -49% (vs SPX -11%) with a combination of industry multiple compression, reduced investor appetite for revenue multiple-based valuation, increased focused on profitability (including, as we do, adjusting for stock-based compensation) & much lower investor tolerance of long-term investments given the uncertain macro env’t (inflation, Ukraine conflict, tight labor markets, softening consumer demand & rising interest rates).

Goldman’s analysts see a weaker macroeconomic environment and “solidly lower revenue growth” in the future, reflecting “broader industry maturation.” They intend to continue using profit-based estimates focused on GAAP EBITDA or free cash flow minus stock-based compensation as “anchors” for valuations.

In addition to Airbnb, which Goldman downgraded to Sell back in February, the company has now downgraded Netflix Inc. (NASDAQ: NFLX), eBay Inc. (NASDAQ: EBAY), Roblox Corp. (NYSE: RBLX), and Frontdoor Inc. (NASDAQ: FTDR) to Sell and lowered their price targets.

Streaming video giant Netflix was downgraded from Neutral to Sell and the 12-month price target was dropped from $265 to $186. Goldman’s analysts noted:

[W]e have concerns around the impact of a consumer recession as well as heightened levels of competition on demand trends (both in the form of gross adds and churn), margin expansion, & levels of content spend and view NFLX as a show-me story with a light catalyst path in the next 6-12 months.

The $186 price target implies a 6% downside from current levels compared to a 28% upside for other stocks in Goldman’s internet universe.

Shares have traded in a 52-week range of $162.71 to $700.99 and the stock trades Friday morning at around $183.95, down about 4.6% for the day. Netflix does not pay a dividend and the total shareholder return for the past year was negative 62.2%. The stock price is down about 62.1% over the past 12 months.

Online auction site eBay has been downgraded from Neutral to Sell and the price target has been cut from $52 to $42. The analysts commented:

With the global consumer environment under pressure and eCommerce growth slowing in a post-pandemic world, we see eBay’s forward [gross merchandise value] and revenue growth at risk [especially] given its overexposure to international markets and as recently launched growth initiatives (e.g., focus categories) not having scaled yet and require incremental investments.

The $42 12-month price target implies a 12% downside from current levels compared to a 28% upside for other stocks in Goldman’s internet universe.

eBay’s 52-week trading range is $43.28 to $81.19 and the stock currently trades at around $44.65, down about 4.4% for the day. The company pays a dividend yield of 1.97% and the total shareholder return for the past year was negative 32.2%. The share price is down about 31.3% over the past 12 months.

Interactive entertainment platform Roblox had its rating cut from Neutral to Sell and the price target was sliced from $39 to $28. While Goldman’s analysts continue to view the company as the best-positioned in its category for long-term growth, they are less sanguine about its near-term outlook:

[W]e have increasing concerns around the post-pandemic environment and expect a continuation of slowing growth, tough comps, & normalization of margins in the near-term. Compared to other video game companies within our coverage universe, Roblox saw outsized growth during the pandemic given its open-world platform and skew towards a younger demographic which is why we have heightened levels of concern around tough comps ahead (relative to the rest of the group).

The $28 price target implies a 10% downside from current levels compared to a 28% upside for other stocks in Goldman’s internet universe.

Roblox’s 52-week trading range is $21.65 to $141.60 and the stock currently trades at around $28.50, down about 7% for the day. The company does not pay a dividend and the total shareholder return for the past year was negative 68.9%. The share price is down about 31.3% over the past 12 months.

Home services provider Frontdoor was also downgraded from Neutral to Sell and its price target was lowered from $27 to $21. The analysts commented:

We believe investor debates around inflation in the home services space [are] likely to remain a headwind for FTDR, with cost inflation likely to keep gross margins under pressure and uncertainty as to the company’s ability to mitigate such headwinds with pricing increases without impacting churn, incremental demand, etc.

The $28 price target implies a 12% downside from current levels compared to a 28% upside for other stocks in Goldman’s internet universe.

Frontdoor stock’s 52-week trading range is $22.72 to $52.08, and the low was posted earlier this morning. Shares currently traded at around $22.90, down 4.5% for the day. The company does not pay a dividend and the total shareholder return for the past year was negative 55.1%.

Goldman Sachs’s internet coverage universe comprises 42 companies in 8 categories: digital advertising, eCommerce, online travel, ridesharing, delivery & local commerce, stream media/gaming, cloud computing, and online dating. Of the 42 companies, 19 have earned a Buy rating and six have been rated a Sell. Goldman raised its 2023 sales estimate for only one company, France-based video gamer producer Ubisoft. Music streaming service Spotify and Ubisoft were the only two companies in Goldman’s universe to see increased estimates for 2023 GAAP EBITDA.

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