SunTrust Bullish on 4 Internet Leaders That Share One Key Metric

By Lee Jackson Updated Jan 12, 2:22AM EST · Published Mar 16, 9:50AM EDT

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SunTrust Bullish on 4 Internet Leaders That Share One Key Metric — © courtesy of Facebook Inc.

Clearly, technology rules our world. It not only will continue to rule but will grow in importance to our daily lives. Who do you know that doesn’t have a smartphone? Probably nobody. How many people do you know that have cut the cord and don’t have cable, but use over-the-top streaming programming like Hulu? Probably more and more.

As technology continues the inexorable march higher, valuable talent is needed at the biggest companies, and company stock is one carrot that is often dangled. The top companies offer stock-based compensation (SBC), and a new SunTrust report examines who is the most efficient at deploying it.

The report said this:

SBC is an effective tool to incentivize and retain key talent, but it’s a real expense that Internet investors need to closely examine, given its dilutive effect over time. We’ve analyzed data from our entire coverage universe and found that different boards have granted varying levels of SBC, not always commensurate with management and/or stock performance.

The report also highlighted four companies with improving SBC efficiency as a percentage of EBITDA, and all are rated Buy at SunTrust.

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Alibaba

This red-hot momentum play has continued to be among the most bought tech companies on Wall Street. 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.

SBC as a percentage of EBITDA has dropped from 32% in 2015 to 22% in 2017, a dramatic improvement.

The SunTrust price target for the stock is $225, and the Wall Street consensus target is $223.59. The shares traded early Friday at $199.00.

Facebook

The huge social media leader has continued to post gigantic numbers. Facebook Inc. (NASDAQ: FB) operates the largest social network, with over 2.0 billion monthly active users and over 1.4 billion daily active users. The company generates revenue from advertising and from payments, with over 95% of revenue from advertising. It generates close to 50% of revenues in the United States and Canada and is expanding rapidly in international markets.

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.

SBC as a percentage of EBITDA has dropped from 26% in 2015 to 14% in 2017, another pretty dramatic improvement.

SunTrust has a $225 price target, and the consensus target is $222.81. The shares traded at $184.50 Friday morning.

Bookings

This internet travel leader was formerly called Priceline. Bookings Holdings Inc. (NASDAQ: BKNG) is an online travel business offering price disclosed and opaque airline tickets, hotel rooms, rental cars, vacation packages and cruises. The company generates over 85% of gross profit from its international brands. Priceline operates Priceline.com, Booking.com, Kayak.com, Agoda.com, Rentalcars.com and OpenTable.

SBC as a percentage of EBITDA has dropped from 7% in 2015 to 5% in 2017, another solid number that reflects a very low part of compensation.

The $2,350 SunTrust price objective compares with a $2,203.60 consensus estimate. The stock traded at $2,190.15.

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Shutterfly

This stock has been on fire since late last year, and it is another SunTrust favorite. Shutterfly Inc. (NASDAQ: SFLY) is an e-commerce company that enables consumers to store, share and create photo-related merchandise, such as photo books, personalized calendars, greeting cards and numerous other products. The company operates Shutterfly, Tiny Prints, Wedding Paper Divas, BorrowLenses.com and ThisLife.

Shutterfly also operates an enterprise printing business and is based in Redwood City, California, while operating manufacturing facilities in Arizona, Minnesota and South Carolina.

SBC as a percentage of EBITDA has dropped from 31% in 2015 to 19% in 2017, another sizable decline.

SunTrust has set its price target at $90. The consensus target is $65.25, and shares were last seen at $85.25 apiece.

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While the stock-based compensation is hardly the most important balance sheet metric, it is increasingly important, and these top companies are managing it as well as anybody in the technology world.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.