Technology

Why Credit Suisse Sees Massive Upside for Alphabet, Amazon and Facebook Into 2018

Jon C. Ogg

Published: October 11, 2017 10:40 am

Last Updated: January 12, 2020 7:18 am

The bull market is now closer to being nine years old than it is to eight, and it has created more wealth and recovered more market losses than most investors could have ever imagined. Many investors focus on the so-called mega-cap stocks, those worth $100 billion or more, because sometimes there is a perfect storm allowing the large to get even larger. Investors who have bought into the pullbacks and sell-offs have been handily rewarded for taking risk, and those same investors are wondering how best to deploy capital into 2018 and beyond.

Credit Suisse has just become more than aggressive in its mega-cap coverage of the largest internet giants. The firm sees a much stronger landscape for Alphabet, Amazon and Facebook. Outperform ratings were already in place, but the price targets hikes were so large that Credit Suisse is now the most aggressive of all firms when it comes to the analyst targets.

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What is amazing about these businesses is that they still seem to have almost limitless growth. All the controversies over too much dominance, playing indirect roles in election tampering, government fines and new taxes just haven’t seemed to keep a lid on them. So far in 2017, the gains have been way above market: Alphabet is up 25%, Amazon up 32% and Facebook up 49%. The Dow is over 15% higher and the S&P 500 is up about 14%.

Investors need to consider many issues when following analyst calls, particularly after the runs that have been seen and considering where we are in this bull market. With Credit Suisse calling for an average upside here of 36%, investors have to consider that the typical upside for Buy and Outperform ratings on Dow or S&P 500 stocks is in a range of 8% to 10% at this time.

Credit Suisse feels that the second half of 2016 marked the beginning of a return to an investment cycle across all the large cap internet operators and that the companies are now deploying incremental capital for boosting operations or to acquire adjacent businesses and profit pools. Credit Suisse’s Stephen Ju and Paul Bieber said:

We continue to believe stock performance throughout the balance of 2017 and looking into 2018 will hinge more on individual company and product-specific catalysts, as opposed to a broader sector-wide theme given the disparate nature of some of these businesses.

Amazon.com Inc. (NASDAQ: AMZN) was reiterated as Outperform, but the firm raised its target price to $1,350 from $1,100. The main issue about the grocery war being launched is that it may be about fulfillment rather than on price.

The Amazon report is among the new adjusted reports that have incorporated the Whole Foods financials into the estimates along with the expected incremental delivery costs from Prime Now. Credit Suisse’s report said:

As far as we are concerned, the combination of Prime Now with Whole Foods presents what we had originally thought would be the rollout of Amazon Fresh in late 2013/early-2014. And as we cross-reference WFM’s existing store footprint (by zip code) in the US with Prime Now delivery zones, we find that there is only a 50% overlap. This leads us to conclude that Amazon can over the medium term expand Prime Now’s presence by up to 50% into those cities where the population density matches existing regions. Hence, while price cuts capture the headlines, we submit that Amazon will wage war with its competitors with service instead.

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Alphabet Inc. (NASDAQ: GOOGL) was reiterated as Outperform and the price target for the parent of Google was raised to $1,350 from $1.100. The firm points out that its own checks are indicating that its search results are trending well and that YouTube is doing better.

Credit Suisse’s new estimates are rolling out to 2018, and the firm said of the company:

Our conversations with advertisers suggest minimal search budget growth deceleration coupled with potentially accelerating spend on YouTube due to multiple factors. For Search we believe the driving factors are: 1) continued increase in mobile search traffic, 2) higher CPCs due to greater usage of location-based targeting for brick and mortar retail operators, 3) ongoing benefits from Expanded Text Ads – particularly for overseas advertisers.

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For YouTube, the firm thinks that advertisers who pulled back during the first half of 2017 are back and accelerating budget deployment to the video side of the business. Additional divers for Google are ongoing monetization improvements in search (expanded text ads and individual bid adjustments), a larger contribution from Google’s larger non-Search businesses (YouTube, Play and Cloud) and value being created by initiatives such as Maps, Waymo, Life Sciences and more.

Facebook Inc. (NASDAQ: FB) was also reiterated as Outperform, and the firm raised its target price to $235 from $190. Credit Suisse thinks much of the “controversies news” is behind it, and the firm recalibrated its own product-by-product model for the higher estimates.

Credit Suisse believes that Facebook will be able to drive long-term revenue growth without a material lift in ad loads. Also noted as drivers were Instagram, Premium Video, DPA and upside to the monetization potential of upcoming new products like Graph Search.

For the third quarter, Credit Suisse increases its mobile news feed estimates from $5.8 billion to $6.2 billion and raised its fourth quarter estimate from $7.3 billion to $7.4 billion. The firm’s report said:

Controversies around Facebook shares that existed end-of-2016 and in the first half of 2017 on ad load growth deceleration now seem well behind us with two consecutive quarters of ad price acceleration to offset. It is the rising advertiser propensity to spend a greater portion of budgets on more targeted buys at effective CPMs more than double that of the untargeted buy.

All in all, Wall Street and Main Street seemed to be chasing these three analyst calls only marginally. The stock market just hit a new all-time high on Tuesday, and these stocks have all handily outperformed the market. Some of the more cautious investors might even think back to some of the dot-com bubble analyst calls seen at the start of 2000 or the end of 1999. That being said, that period had valuations that were by and large much higher on a multiple-basis (P/E, times-sales, etc.) than in 2017.

Shares of Amazon were last seen up 0.6% at $992.62, and they have a 52-week range of $710.10 to $1083.31. The consensus analyst price target from Thomson Reuters was closer to $1,160, and the new $1,350 Credit Suisse target, for almost 36% projected upside, compares to a prior street-high analyst target of $1,400.

Alphabet was trading up 0.7% at $994.45 Wednesday morning. It has a 52-week range of $743.59 to $1,008.61 and a consensus price target of almost $1,100. Alphabet’s target of $1,350 at Credit Suisse compares to a prior street-high price target of $1,250, and it target implies upside of about 36%.

Facebook shares traded up 0.3% at $172.16, and they have a 52-week range of $113.55 to $175.49. Facebook’s consensus price target was closer to $195 before Credit Suisse’s target jumped up to $235. The prior street-high target price before this call was $230. Credit Suisse is calling for roughly 36% upside here.

Please note: As a final reminder, investors have to treat all analyst calls as supplemental information rather than as sole-source or primary reasons for buying or selling a stock. 24/7 Wall St. wouldn’t want its readers thinking we just follow and believe every analyst call just because it was released. Sometimes the analysts get their numbers and expectations wrong, and sometimes outside events wreck a bullish thesis, above and beyond what the market was prepared for.

Also check out Wednesday’s other top analyst upgrades, downgrades and other research calls.