Last year saw extended market volatility, especially in December. This was especially pronounced in most of the mid- and small-cap internet stocks, which ended the year with double-digit percentage share price declines. Canaccord Genuity took a look at these firms in its coverage universe and it sees a few really taking off.
The firm believes steady fundamentals likely supported a recovery in these stocks, with the internet space rebounding sharply in the first 15 trading days of 2019, and with some smaller cap stocks up 30% to 40% since the beginning of the year. As Canaccord Genuity positions its coverage for 2019, the firm is looking for companies with (1) strong and improving operating metrics, (2) differentiated competitive positions and (3) attractive valuation.
Both Grubhub Inc. (NYSE: GRUB) and Wayfair Inc. (NYSE: W) are executing well against their large addressable markets, and both are investing in building brand affinity with consumers, aggressively expanding the number of delivery markets in the case of Grubhub and investing heavily in headcount in the case of Wayfair.
Zillow Group Inc. (NASDAQ: ZG) went through a multifaceted operating model transition in 2018, with a new lead validation and distribution model and the Homes segment. These initiatives created near-term headwinds, but Cannaccord Genuity thinks Premier Agent revenue growth likely will accelerate in the second half of 2019, reflecting improvements rolled out last year, and the Homes division is a channel for Zillow to expand beyond its media advertising platform roots and move closer to a marketplace transactional model.
Leaf Group Ltd. (NYSE: LEAF) had a solid year in 2018, as management continued to strengthen and diversify the business. To keep growth going, management will need to work through sales concentration on third-party platforms like Amazon and Houzz for the e-commerce segment and continue to reduce exposure to Google to drive traffic to its media properties.
With increasing competition from Facebook and ongoing Android app headwinds, Snap Inc. (NYSE: SNAP) continues to struggle with user growth. Despite this, the company ended the year on more stable footing, with pre-announced fourth-quarter revenue and EBITDA ahead of previously provided guidance. Snap’s management turnover, including the recent departure of Chief Financial Officer Tim Stone, could weigh on sentiment.
Unlike Snap, the Blue Apron Holdings Inc. (NYSE: APRN) customer losses over the past several quarters eventually led to declining revenues. In an attempt to curtail operating losses and cash burn, the company is reducing its workforce by about 4% and lowering its marketing spend to focus on the most productive and loyal cohort of its customer base.
Cannaccord Genuity listed its ratings for these companies as follows:
- Grubhub has a Buy rating with a $110 price target, implying upside of 48% from the most recent closing price.
- Wayfair has a Buy rating and a $130 price target, implying upside of 35%.
- Zillow’s Buy rating comes with a $42 price target, which implies upside of 37%.
- Leaf Group has a Buy rating and a $14 price target, so the implied upside is 83%.
- Snap has a Hold rating with a $6.25 price target, with upside of 4%.
- Blue Apron’s Hold rating comes with a $2 target price, implying upside of 49%.
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