While investors in struggling companies occasionally benefit from a buyout that juices the stock, Raymond James said that shareholders of floundering internet stocks should not hold out hope given a variety of factors pressuring the sector.
"In most sectors, public companies that struggle are ultimately acquired, often by another public company. Internet businesses are proving to be the exception to this rule; segments may be sold, but rarely the whole company," Raymond James analyst Justin Patterson in a note to investors on Tuesday titled "Lonely at the Altar."
He specifically called out two M&A candidates as appearing unlikely: Grubhub and Yelp. The food delivery service has been a rumored target of Uber, but Patterson said he specifically doesn't see a Grubhub acquisition happening because the cost would be too high.
He also noted that "operating multiple food delivery brands would be tricky and is less efficient from a marketing perspective" for Uber.
As for Yelp, Patterson said he struggles to see a buyer for the company because of "low monetization" and "peak traffic amid competition."
In the past two years, Pandora and Shutterfly are the only significant deals of companies that Raymond James covers, which were acquired by SiriusXM and Apollo Global Management, respectively. Both of those deals happened at meager premiums for shareholders, Patterson noted, with Pandora netting 12% above its market value and Shutterfly taken out for 1% above its market value.
Raymond James cites seven reasons for why public internet company M&A has slowed.
"1) Hyper-growth is over. Rising penetration rates were a tailwind through 2014. That tailwind has since faded and growth has slowed. 2) Traffic is expensive. SEO is no longer viable, creating CAC headwinds. 3) Competition is fierce. Switching costs are low and private companies invest aggressively. 4) Monetization has inherent limits. These limits reflect TAM size, traffic and conversion quality, and pricing power. 5) Earnings quality is mixed. SBC is a real cost of doing business. 6) M&A track records. Recent public deals have not moved the needle. 7) Regulatory scrutiny has increased. Most deals are subject to more scrutiny," Patterson said.
While Raymond James sees "little appetite" for buyouts of entire companies as likely, the analyst does expect to see more acquisitions in the manner of internet companies exchanging business units.
"Segment level M&A remains a very real phenomenon, as evidenced by eBay's sale of StubHub to Viagogo," Patterson said.
– CNBC's Michael Bloom contributed to this report.