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Liberty Interactive Cut to Neutral

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We are downgrading our recommendation on Liberty Interactive Corp. to Neutral based on its current valuation, which soared nearly 25% in the last year. We believe the stock is currently fairly valued. Meanwhile, the company continues its robust performances as the third quarter of 2012 financial results outperformed the Zacks Consensus Estimates.

In our view, the TV home shopping business will continue to flourish in the near future. The prestigious QVC division of Liberty Interactive continues to perform exceptionally well. The QVC shopping network has successfully transformed itself into a powerful global brand, which may facilitate Liberty Interactive to boost its revenue in double digits. The strategic move taken by management to offer QVC programs on mobile platforms, such as smartphones and tablets, was a huge success. Further, Liberty Interactive is continuously generating positive free cash flow to sustain its future endeavors.

Liberty Interactive’s QVC division has become the undisputed market leader in the $8 billion TV home-shopping business. Currently, QVC commands an estimated 69% market share, far ahead of its nearest rivals, HSN Inc. and ValueVision Media Inc. . TV home-shopping business is characterized as having quite stable customer base, generally women. QVC accounts for over 11 million customers in the U.S., which is expected to grow in the long term.

Recently, QVC bought 4.8 million shares of TripAdvisor Inc.’s (TRIP - Free Report) commons stock for approximately $300 million. TripAdvisor is the world’s largest travel site, which allows users to post reviews of airlines, hotels, and vacation resorts throughout the world. With this transaction, Liberty Interactive currently holds about 22% of the equity and 57% of the total votes of all classes of TripAdvisor common stock.

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