Technology

RBC Has 4 Sizzling Internet Stocks to Own for the Rest of 2019 and Beyond

Lee Jackson

Published: August 20, 2019 6:40 am

Last Updated: January 30, 2020 5:13 pm

While the volatility in the market has sent some investors to the sidelines, the reason for the nervousness is global growth and the fears that it could slow major economies around the world into recession. The fact is that while there is every reason to believe we will encounter a recession in the future, the data now suggests that, at least in the near term, all looks good, especially for the United States.

While the market is expensive, and some stocks are very frothy, note that the overall stock market was at the same level last week as it was in the same week in August 2018. In other words, we have gone nowhere. With that in mind, aggressive accounts may want to look to the top internet stocks for the rest of 2019.

A new RBC research report notes that internet advertising is on fire, and while there are many reasons why, the growth doesn’t look to slow down anytime soon. The report said this about the advertising results of the top large-cap internet stocks:

Every single one of these companies (Google, Facebook, Amazon, Twitter and others) reported accelerating Ad Revenue growth in the second quarter. It has been years since we have seen this happen. In fact, we’re not sure we can pinpoint a quarter when this has previously happened.

RBC is focused on four top large-cap stocks that it rates Overweight and that make good sense for aggressive growth accounts looking for solid long positions for the rest of 2019.

Facebook

The huge social media leader has been incredibly volatile and had an absolutely wretched 2018. Facebook Inc. (NASDAQ: FB) is 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.

The company’s 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, enables people to reach others instantly, as well as enable businesses to engage with customers. WhatsApp Messenger is a mobile messaging application.

Despite the volatility in the stock, RBC loves the prospects:

Second half 2019 stabilization in Revenue growth & EBITDA Margins appears highly probable, as Stories monetization ramps and Comparisons get easier. And the company that owns the world’s 4 largest Social Media & Messaging assets trades at 18 times 2020 estimated price to earnings, that’s compelling.

The RBC price target for the shares is $260, and the Wall Street consensus target is lower at $232.33. The shares closed trading on Monday at $186.17.

Netflix

This Wall Street darling and FANG constituent was hammered in July and is offering a great entry point. Netflix Inc. (NASDAQ: NFLX) is the world’s leading internet television network, with more than 120 million members in over 190 countries enjoying more than 125 million hours of TV shows and movies per day, including original series, documentaries and feature films.

Members can watch as much as they want, anytime, anywhere, on nearly any internet-connected screen. Members can play, pause and resume watching, all without commercials or commitments. Netflix is available on virtually any device with an internet connection, including personal computers, tablets, smartphones, smart TVs and game consoles, and it automatically provides the best possible streaming quality based on the available bandwidth.

Many of its titles, including Netflix original series and films, are available in high-definition with Dolby Digital Plus 5.1 surround sound and some in Ultra HD 4K. Advanced recommendation technologies with up to five user profiles help members discover entertainment they will love.

Recent price increases and potentially record-high Sub Adds in in the second half of 2019 should help generate revenue growth acceleration & margin expansion as the company benefits from its arguably strongest-ever second half content slate.

RBC has a $450 price target, well above the $388.40 consensus figure. The shares closed Monday at $309.38, so hitting the RBC target would be a 35% gain.

Spotify

This top company has revolutionized music streaming and its shares look poised to move higher the rest of the year. Spotify Technology S.A. (NYSE: SPOT) owns the largest streaming music subscription service in the world, controlling a 42% market share via 157 million total monthly active users, 90 million ad-supported monthly active users and 71 million premium subscribers across 65 countries and territories.

Spotify generates 90% of its revenues from premium service subscriptions and 10% of its revenue from advertising via the company’s free, limited-access service. The company also owns a 9% stake in Tencent Music Entertainment, the largest music streaming platform in China.

The RBC analysts remain positive and noted this:

Stabilizing average revenue per user and easing second half revenue growth comparisons suggest potential for business model inflection (Operating Profit/Free-cash-flow and Gross margins driving up long-term). Potential catalysts include renewal of last two major label deals and the likely launch of two-sided marketplace before year-end.

RBC has set a $185 price target on the shares. The consensus target is $168.66, and shares were last trading at $150.10.

Uber

This stock is still trading below the recent initial public offer price and could be a big winner for patient accounts. Uber Technologies Inc. (NYSE: UBER) is a mobility platform that services 63 countries, over 750 ridesharing markets and more than 500 Uber Eats markets, and nearly half of Core Platform Revenue is generated outside of the United States.

The company’s monthly average paying customers represent 1% to 2% of the world’s population on a monthly basis. For rides, Uber acts as a middleman, connecting riders with drivers. For Eats, the market is three-sided, connecting customers, restaurants and drivers. Uber also has an emerging freight business.

Despite the poor post-IPO performance, the long-term story is exciting. RBC said this when commenting on the stock:

Easing comparisons and fee increases could generate Bookings & Rev growth accelerating in the second half, with marketing personnel rationalization and other steps potentially translating to declining EBITDA losses. And valuation at 2.6 times 2020 estimated enterprise value/sales is compelling.

The $62 RBC price target compares with the $51.47 consensus target and the most recent close at $34.61 a share.

RBC is focused on stories that have solid upside potential and that cover the wide gamut of internet-based business models. While these are not suitable for conservative accounts, aggressive growth players with a longer time horizon could make serious money on these companies that dominate their respective internet niches.