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Liberty Interactive to Underperform

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We downgrade our recommendation on Liberty Interactive Corp. to Underperform based on the company’s weak financial results for the fourth quarter of 2012. While the top line barely met the Zacks Consensus Estimate, net income fell below the same.

Why the Downgrade?

A major concern for Liberty Interactive is that the growth rate of the company’s QVC segment has slowed down significantly.This segment currently generates approximately 85% of the company’s total revenue and 100% of operating profit. Therefore any fluctuations in the revenue stream of QVC will significantly affect the company’s overall financials.

Furthermore, the stock price has also soared nearly 35% in the last year and is trading at the high end of its 52-week price range. With respect to several valuation metrics, the stock is trading at significantly higher multiples compared with the S&P 500. Liberty Interactive currently has a Zacks Rank #3 (Hold).

Other Causes of Concern

According to a report of Internet Retailer, after Inc. (AMZN - Free Report) , QVC was the second-largest e-commerce retailer of the U.S. in 2012. Despite this,the e-commerce businesses of Liberty Interactive are still reeling under losses. In the reported quarter, adjusted operating income before depreciation and amortization of this segment fell by an enormous 29%, year over year. Low advertising revenue and increased promotional activities are the primary reasons for this sorry state of affairs.

With 69% market share, QVC has become the market leader in the $8 billion TV home-shopping business. This places QVC far ahead of its rivals, HSN Inc. and ValueVision Media Inc. . However,increasing deployment of personal video recorders, video-on-demand technology and IPTV network are gradually changing the distribution and viewing habits of the common people. These fundamental changes are taking a toll on the home shopping networks.

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