The strength shown in the second-quarter earnings reports from Amazon.com Inc. (NASDAQ: AMZN), Alphabet Inc. (NASDAQ: GOOGL) and Facebook Inc. (NASDAQ: FB) may lead an investor to believe one of two things about the internet sector. One, it’s deja vu all over again, or, two, let’s party like it’s 1999.
For the year to date, Alphabet is up 20%, Amazon is up nearly 33% and Facebook has added just over 50%. These three stocks have just garnered a “Top Pick” rating from Mizuho Securities analyst James Lee who is reinstating coverage of five internet stocks.
Lee also rated eBay Inc. (NASDAQ: EBAY) and Twitter Inc. (NYSE: TWTR), both of which did not fare as well.
Before looking at the individual stocks, here’s Lee’s overall view of the internet sector:
We believe that the internet industry still has a very long secular runway with digital marketing being 30% of total ad spending and ecommerce being 10% of total retail sales. For on-line advertising, we believe the shift to TV is the next green field opportunity at about 40% ad spend globally, driven by increased adoption of video advertising in mobile and messaging. For ecommerce, we believe that the convergence with advertising will drive further penetration, leveraging search advertising on the commerce platform to optimize conversions and voice search to enable brands selling direct to consumers.
Here are Lee’s comments on the individual companies, along with their ratings and price targets.
Amazon
We expect margins are poised to expand over time with a positive mix shift to higher-margin products in core commerce, CBT [corporate and banking technology] and cloud computing. Most importantly, we believe the next pillar of growth will likely coming from advertising through voice search, allowing brands to sell to consumers directly. That said, we believe Amazon has many levers to harness its monetization potential beyond our model in terms of EBITDA growth. Our analysis indicates 35% upside potential compared to our 2019 EBITDA forecast.
Mizuho reinstated coverage of Amazon with a Buy rating and a price target of $1,250 per share. Amazon’s shares traded at $991.99 in the early afternoon Tuesday, in a 52-week range of $710.00 to $1,083.31. The consensus price target on the stock is $1,135.39.
Alphabet
The company is benefiting from positive secular trends of online advertising and closing the monetization gap of mobile against PC with new technologies, in our view. We believe GOOGL has many levers to harness its monetization potential beyond our model in terms of rev per user growth, including gaining share from TV ads, closing the mobile monetization gap, online travel, mobile app advertising and cloud computing. We expect that a portfolio of new rev streams could eventually increase rev/user/year by 30% over our 2019 forecast.
The firm is reinstating coverage on Alphabet with a Buy rating and a price target of $1,220. Alphabet’s 52-week price range is $743.59 to $1,008.61 and shares traded at $947.51 Tuesday afternoon. The consensus price target on the stock is $1,078.42.
FB has a unique advantage of double leverage in both pricing and inventory growth. Pricing leverage is achieved through highly engaging ad formats such as video and best-in-class targeting that yields a higher ROI for advertisers. Inventory leverage is achieved by delivering Facebook’s ad formats and leveraging data across multiple properties: Instagram, FAN [Facebook Audience Network] and mobile messaging. We believe FB has many ways to achieve its monetization potential beyond our model. We expect new revenue streams could eventually increase revenue/user/year by 70% over our 2019 forecast.
Mizuho gives Facebook a Buy rating and a price target of $230. Shares traded at $172.60 this afternoon, in a range of $113.55 to $175.49. The stock’s consensus price target is $191.46.
eBay
The company is in a transitional period of upgrading its user experience through structured data implementations and product page upgrades while revamping its merchant tools to drive efficiency and close the gap with peers. We believe eBay is a turnaround story with considerable execution risks; we would be less concerned if technology improvements drive sustainable GMV [gross merchandise value] growth and the competition pressure for CBT becomes more stable.
Mizuho’s Lee reinstated coverage of eBay with an Underperform rating and a price target of $34. Shares traded at $36.46 Tuesday afternoon, in a 52-week price range of $27.28 to $37.48, and the consensus price target is $37.46.
The company is going through another phase of transition; becoming video-centric by adding premium content and livestream on top of its current video ad offerings. In addition, ad buying on TWTR is also moving to a reach- & frequency-focus, allowing large agency holding companies and TV ad buyers to more easily transition to its platform but increasing ad load. We expect that increased supply, competition and TWTR’s premium pricing will likely yield further pricing pressure.
Reinstated coverage of Twitter comes with an Underperform rating and a price target of $14.50. The stock traded at $16.29 Tuesday afternoon, in a 52-week range of $14.12 to $25.25. The consensus 12-month price target is $15.97.
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