With most major tech earnings imminent, it is important to consider what the major companies dominating the internet are expected to do for earnings and what will be their key issues ahead. The Jefferies internet coverage is led by Brian Pitz and Brian Fitzgerald, who they have released their top internet theme picks for earnings season and beyond.
The Jefferies team is positive on focus stocks like Amazon.com Inc. (NASDAQ: AMZN) taking from brick-and-mortar and on web operations, and on and Alphabet Inc. (NASDAQ: GOOGL) for search, mobile and online video. They are also quite positive on Facebook Inc. (NASDAQ: FB) in social media, and remain so on digital performance marketing player Criteo S.A. (NASDAQ: CRTO) despite some of the concerns around that company.
Tuesday’s report shows that ad dollars continue shifting online to the benefit of Facebook, Google (Alphabet) and Criteo. The biggest risk is foreign exchange (FX) and Brexit, which could impact outlook across the group.
Amazon
Amazon.com is now expected to beat expectations with reaccelerating top-line growth and continued market share gains. Another strength will be Amazon Web Services (AWS), despite growing competitive pressures. The company’s evolving fulfillment strategy is another strength, and Jefferies even said that Amazon may be the best-positioned large-cap internet name for the remainder of 2016.
Amazon has a Buy rating and $865 price target at Jefferies, versus a current price of $736.26 and a 52-week high of $757.34. Its consensus analyst target price is $810.87. Jefferies said:
Amazon remains our top large-cap eCommerce pick as it continues to gain market share from brick-and-mortar and smaller online retailers. Our biggest concerns are around spending on fulfillment and AWS. We are modeling net revenue of $30.03 billion (+30% Y/Y) versus Street at $29.52 billion and guidance of $28.0 billion to $30.5 billion. We expect GAAP operating income of $1.01 billion versus Street expectations of $893 million and guidance range of $375-$975MM. We are also modeling pro-forma operating income (CSOI) of $1.83B vs. Street at $1.68B and implied guidance range of $1.2 to $1.8 billion. Our GAAP EPS of $1.19 is above Street’s $1.09.
Jefferies is positive on Facebook as well, with a Buy rating and a $160 price target. It expects that Facebook will deliver strong results driven by mobile, especially Instagram, for the second quarter, and the firm sees upside to its below-consensus second-quarter estimates. Still, Jefferies has increasing questions around Facebook’s longer-term positioning. The firm is sees 45% annual revenue growth coming with 58% EBITDA margin.
Facebook’s share price was last seen at $121.02, in a 52-week high of $122.20 and with a $143.52 consensus price target.
The Jefferies report said:
We note that results will be driven by mobile, especially Instagram which continues to ramp monetization efforts on a 500 million-plus monthly active user base. For the second quarter, we see upside driven by Dynamic Product Ads on Instagram, offset by a tougher year-over-year comp due to leap year. Facebook Messenger now has 1 billion users (up from 900 million in April 2016). Longer term we have increasing questions around positioning with millennials with a particular concern around users and brands migrating to Snapchat, and eventually the related impact to Instagram revenue.
Alphabet was featured positively. Jefferies is seeing its channel checks showing relatively solid growth in mobile search, YouTube, Programmatic advertising and PLAs for Google. The firm did note that paid search in the United States declined 1%, but mobile impressions were up 46% and clicks increased 69%. The Jefferies report said:
We maintain that online video is the biggest online ad growth driver and YouTube continues to be the premier vehicle to play the trend with 1B+ users. We model net revenues and Non-GAAP EPS of $16.9 billion and $8.37, well ahead of Street $16.6 billion and $7.96. Our estimates imply 21% Y/Y growth in net revenues, and 27% Y/Y growth in Non-GAAP EPS.
Alphabet was rated as Buy, with a $925 price target. Its shares were last seen at $752.75, with a 52-week high of $810.35 and a $908.93 consensus price target.
Criteo
Criteo was mentioned on a day that the stock happened to be down 6.5% at $40.91, so this call may seem off or muted rather than had the call been made another day. The Jefferies report suggests that it is looking for the 11th straight earnings beat for its top small cap pick Criteo. The report said:
We expect Criteo will rapidly expand its presence on Facebook in 2016 with Instagram monetization and Dynamic Product Ads served directly into the user’s Facebook news feed. Bears focus on Facebook as a potential threat to Criteo and we believe any positive commentary around Facebook will directly counter this bear thesis. Outlook could reflect impact from FX given Criteo is a European company and any weakness in the Euro will actually result in lower operating expenses potentially driving an improved margin profile when translated.
Criteo’s 52-week trading range is $24.23 to $54.70. Its consensus price target is $51.88.
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