Internet companies may be clouding their results with "adjusted earnings" or "adjusted EBITDA" (earnings before interest, taxes, depreciation and amortization) that make themselves appear more profitable than they really are,
USA Today reported.
The newspaper cited a research report from Deutsche Bank analyst Ross Sandler, who concluded the practice is apparently common.
"We have seen an increased amount of tampering in the definition of EBITDA (cash flow) from consumer Internet companies of late, as the universe expands and different business models enter the public market," Sandler stated.
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For example, Demand Media, AOL and Angie's List are among the online content companies making "aggressive" adjustments to their earnings, he noted.
USA Today reported some of the current Internet company accounting practices are reminiscent of the dot-com bubble of the last decade — which of course ended in a dot-com bust.
"The return of aggressive adjustments to 'adjusted earnings' or 'adjusted EBITDA' is the redux of an ugly period of financial accounting in the early 2000s, which caused investors to lose faith in the quality of companies' books," USA Today reported.
Deutsche Bank said some Internet companies are adding back charges related to restructurings, acquisitions, gains and losses on financial hedges, legal costs and asset write-downs, thereby hiking their "adjusted" earnings or EBITDA that investors rely on to compare with estimates.
For example, according to USA Today, online real-estate company Zillow reported 40 percent higher adjusted EBITDA by adding back $12.2 million from capitalized costs.
Moreover, the Deutsche Bank report stated, Angie's List capitalized software development costs of $4 million in the first quarter of 2014, rather than including the cost as an expense.
Angie's List CFO Tom Fox said the company was following generally accepted accounting principles. "We work diligently to perform all required audits and we take issue with assertions that there is something amiss here," he said.
Analysts believe the recent selloff in Internet stocks may be an opportunity to buy them,
Forbes reported.
"While value-conscious investors might be wary of catching falling knives, sell-side analysts are banging the table that it's time to sift through the damage and pick up the best companies on the cheap," Forbes said.
Citigroup analyst Mark May, a well-known Internet analyst, advised that now might be a buying opportunity for Internet stocks because their fundamentals have not changed despite the selloff,
The Wall Street Journal reported.
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