Merrill Lynch’s Top 4 Internet Stocks for the Second Half of 2017

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The technology sector has seen a big boom over the course of the past year, with the Technology Select Sector SPDR ETF (NYSEMKT: XLK) up over 25% in this time, beating out the broad markets. Even looking forward, the sector is poised to beat out the markets for the rest of 2017. With that much confidence tech stocks have to be doing something right, and analysts are picking up on it.

Merrill Lynch singled out a group in the sector that the firm believes will outperform going forward — specifically, internet stocks.

In the mega-cap category, the firm highlighted Facebook Inc. (NASDAQ: FB) for potential ad pricing growth, Instagram strength and signs of approaching messaging monetization. In large cap, Merrill Lynch likes Expedia Inc. (NASDAQ: EXPE), given it has the best opportunity to accelerate growth compared to its peers.

In the small/mid-cap group, IAC/InterActtiveCorp (NASDAQ: IAC) is the top pick on relative valuation as it is currently trading at a negative implied enterprise value (EV) based on its ownership in new entity Angie’s Homeservices and Match.

For year-to-date underperforming stocks with the negative sentiment and higher risk, Merrill Lynch likes Yelp Inc. (NYSE: YELP) for opportunity to accelerate paying account adds.

Merrill Lynch went further in detail on each.

Facebook

This social media giant has a Buy rating with a $170 price objective, implying upside of 9.5% from the prior closing price of $155.27. Merrill Lynch thinks there continues to be caution in the stock on ad load growth deceleration and higher video spending, while the street still has mixed views on the potential for monetization of Messenger. Potential second-half revenue/sentiment drivers include:

  • Pricing tailwinds driven by slower supply growth, new ad formats, and video ramp.
  • Strong traction for Instagram users, engagement, and monetization.
  • More evidence of upcoming Messaging monetization.

Shares of Facebook were last seen trading up 1.5% at $157.64 on Wednesday, with a consensus analyst price target of $169.80 and a 52-week range of $113.55 to $157.85.

Expedia

Merrill Lynch has a Buy rating for Expedia with a $187 price objective. Given the most recent closing price of $149.94, that implies upside of 25%. The firm continues to rate Expedia as its top idea in the e-commerce/travel space for the second half, considering the following:

  • A positive set up for room night growth acceleration into 2Q/3Q and estimate 20% growth in 2Q and 24% in 3Q.
  • We remain bullish on the HomeAway transition to Online bookings, and improving trends could add confidence in the 2018 EBITDA growth story.
  • Improving hotel revenue take rate trends.
  • Strong growth and value contribution from Trivago.
  • An attractive EV/EBITDA valuation.

Shares of Expedia were trading up 1.5% at $152.21, with a 52-week range of $105.62 to $156.39 and a consensus price target of $154.96.

IAC/InteractiveCorp

Merrill Lynch has a Buy rating with a $133 price objective for IAC. Compared to the most recent closing price $103.96, this implies an upside of 28%. The firm commented in its report:

Based on the stock price of Match and Angie’s alone, IAC’s expected ownership in the two positions (assuming the transaction closes as anticipated) exceeds its current market value by $813 million. The addition of IAC’s $741 million cash position implies a negative enterprise value of $1.55 billion. Combined with the other assets, we view the stock as undervalued and do not think the market value dislocation is sustainable. Additionally, we see the market underappreciating other assets within the IAC portfolio (eg. Investopedia and High Line Venture Partners).

Shares of IAC were up 2.2% to $106.29. The consensus price target is $115.47, and the 52-week range is $56.41 to $107.98.

Yelp

The brokerage firm has a Buy rating for Yelp with a $37 price target, implying upside of 19% from the most recent closing price of $31.11. Merrill Lynch recently upgraded Yelp, after missteps in the prior two quarters, given opportunity for improving quarterly net advertiser adds and stabilizing revenue growth to improve sentiment. The firm thinks the following drivers could lead to stock outperformance:

  • Account adds improving to 6K+/quarter by 4Q.
  • Unique device user growth stabilizing at 20%-25%.
  • Optimism returning on transactions services.
  • Yelp delivering meet/beat results vs estimates.

Shares of Yelp were last seen up nearly 2% at $31.69, with a consensus price target of $31.70 and a 52-week range of $26.93 to $43.41.