Despite a marvelous run in 2017, some of the largest capitalization technology and internet stocks have underperformed the market recently as we get ready finish up the year. Many are citing sector rotation, while others say it’s just good old-fashioned profit taking. One thing is for sure: the biggest and most powerful internet companies are poised for years of revenue and earnings growth, and it make sense for aggressive accounts to maintain positions in some.
In a new SunTrust Robinson Humphrey research report, outstanding internet and digital media analyst Youssef Squali notes that while valuations have gone up, the long-term benefits of owning the top companies in the sector still hold merit. The report said this:
The current macro environment and year-to-date returns of 26.5% versus the S&P 500 at +17.4% keep the group at risk of reverting closer to the mean short-term; longer-term, we believe strong fundamentals and attractive growth-adjusted valuations keep us positive on the group.
SunTrust has five favorite stocks in the sector and all are rated Buy.
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Alibaba
This red-hot momentum stock is being bought this quarter by Dan Loeb, who runs Third Point, a New York–based hedge fund. Alibaba Group Holding Ltd. (NYSE: BABA) runs the largest retail marketplaces (Taobao, TMall) and leading B2B sites (Alibaba.com, 1688.com) in China and Lazada in Southeast Asia. It collects revenues mainly from commissions, marketing services, subscription fees, cloud computing and software, as well as other value-added services.
The company has gone beyond e-commerce and developed into a sophisticated new type of conglomerate in the cyber-era with e-commerce as the base for the rest of the four businesses: logistics, finance, data-computing and cross-border infrastructure. Top analysts expect a whopping 24% compounded annual growth rate between now and 2018 for e-commerce in China.
The company recently reported huge quarterly numbers, and the driving force for some of the outperformance included social features, customized mobile app for users, cross-platform user tracking and ad targeting for merchants. In fact, growth returned to the levels the company was at when it went public.
The SunTrust price target for the shares is $210, and the Wall Street consensus target is $208.53. The shares closed trading Friday at $177.62.
Alphabet
The search giant continues to expand and is even working on a driverless car now. Alphabet Inc. (NASDAQ: GOOGL) is a global technology company focused around key areas, such as search, advertising, operating systems and platforms, enterprise and hardware products. It generates revenue primarily by delivering online advertising and by selling apps and contents on Google Play, as well as hardware products. The company provides its products and services in more than 100 languages and in 190 countries, regions and territories.
Alphabet offers performance and brand advertising services. It operates through Google and Other Bets segments. The Google segment includes principal internet products, such as Search, Ads, Commerce, Maps, YouTube, Apps, Cloud, Android, Chrome and Google Play, as well as technical infrastructure and newer efforts, such as virtual reality.
The search leader also pounded earnings estimates when it delivered upside to revenue, margins and GAAP earnings per share. Website ex-currency growth acceleration was a key positive. While higher distribution traffic acquisition costs rate increase could temper enthusiasm, top analysts feel the profit growth trajectory intact.
The analysts see the company benefiting from AI through search, cloud, home assistants, autonomous vehicles, photos, news feed and numerous other applications.
SunTrust has a $1,180 price target. That compares with the consensus target of $1178.57. The shares closed on Friday at $1,049.38.
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Amazon
This absolute leader in online retail and dominant player in cloud storage business remains the top internet pick at many firms on Wall Street. Amazon.com Inc. (NASDAQ: AMZN) serves consumers through retail websites that primarily include merchandise and content purchased for resale from vendors and those offered by third-party sellers.
Amazon Web Services (AWS) is also the undisputed leader in the cloud now, and many top analysts see the company expanding and moving up the enterprise information value chain and targeting a larger total addressable market. The company serves developers and enterprises through AWS that provides compute, storage, database, analytics, applications and deployment services that enable virtually various businesses.
The company absolutely blew out earnings, with the top and bottom lines beating Wall Street estimates. International, retail, subscriptions (Prime) and AWS all came in above expectations. Amazon’s share should continue to expand, supported by new categories.
Most on Wall Street agree that Amazon remains the top destination for increased spending during this year’s holidays with broad advances in toys and electronics. Toss in the fact that Amazon Prime members receive free shipping on many products and there is no reason to believe that the company will not continue its domination of internet sales.
The $1,270 SunTrust price target compares with the $1,258.16 consensus target. Shares were last seen at $1,162.
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Expedia
This online travel leader is poised for a potential big 2018. Expedia Inc. (NASDAQ: EXPE) is the leading internet travel pure-play with exposure to online travel in the United States, Europe and Asia. The company’s portfolio of brands includes Expedia, Orbitz, HomeAway, Travelocity, Hotels.com, Trivago, Egencia, Hotwire, Wotif, Venere and Classic Vacations.
Top analysts see it as a story of improving execution, and they also think that the company is starting to finally match Priceline’s growth metrics. The company has raised its dividend and is buying back stock, both shareholder friendly actions.
Expedia investors are paid a 0.8% dividend. SunTrust has a massive $170 target price. The consensus target is $152.31, and shares closed Friday at $117.54.
The huge social media leader has continued to post gigantic numbers. Facebook Inc. (NASDAQ: FB) operates as a mobile application and website that enables people to connect, share, discover and communicate each other on mobile devices and personal computers worldwide.
Its solutions also include Instagram, a mobile application that enables people to take photos or videos, customize them with filter effects, and share them with friends and followers in a photo feed or send them directly to friends; Messenger, a messaging application for mobile and web on various platforms and devices, which enable people to reach others instantly, as well as enable businesses to engage with customers; and WhatsApp Messenger, a mobile messaging application.
Many feel that Facebook’s long-term forecasts are more easily attainable, especially as the company continues to grow and employ new platforms for online advertising. Facebook is growing at twice the rate of its large cap internet peers while delivering at least 50% operating margins.
Top analysts see further upside ahead from user growth, and the company sees upside potential to its $80 U.S. average revenue per user through better targeting, as well as improvements on Instagram.
The SunTrust price target for the company is posted at $215, and that compares Wall Street consensus price target for the company is $208.21 The shares closed trading on Friday at $179.
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All five of these stocks have pulled back from their highs and are offering better entry points. With that in mind, they are still up big this year, and it may makes sense to buy partial positions and see if we don’t get a larger pullback in early 2018.
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