Technology
Jefferies Very Positive on 4 Top Internet Stocks in Front of Q3 Results
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If any technological advancement has become 100% ubiquitous for most Americans it is the internet. We use it daily for a multitude of tasks, including everything from payments to ordering food, to travel, to checking the weather, to a million other things. Because of the huge adoption of the internet, digital advertising has emerged as the single most innovative breakthrough in the advertising arena since the dawn of TV.
A new Jefferies research report remains very positive overall on the internet and the prospects going forward but also remains selective on the top companies in the sector they like going into the third-quarter earnings prints. The analysts, led by Brent Thill, are very bullish on these four top picks before earnings, and all are rated Buy at Jefferies.
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Alphabet
The search giant continues to expand and, while search is king, the cloud presence is growing fast. Alphabet Inc. (NASDAQ: GOOGL) is a global technology company focused on 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.
Back in the fall, Google outlined expanding capabilities to facilitate commerce, capitalizing on the “treasure trove” of data provided by seven different properties, each with at least a billion active users (Android, Search, Chrome, Maps, Play, YouTube and Gmail). Smart shopping campaigns leverage machine learning to make sense of touch points along the consumer purchase path, including better offline attribution capabilities (locally oriented searches up 200% over past two years) and improved purchase conversion rates (20% on average).
Advertising remains a huge growth area, and the analysts noted this:
Industry ad spending remains healthy as we noted at the Advertising Week conference in September. The company keeps pushing the envelope with advertising surface on YouTube, Google Maps (including travel planning), and local initiatives. We remain positive on Alphabet thanks to attractive valuation, healthy digital advertising market, and call options such as YouTube, Cloud, hardware (expanded product line heading into the holidays), and Waymo (Long-term value ~$250 billion).
The Jefferies price target for the shares is $1,500, and the Wall Street consensus target is $1,343.80 The shares closed Tuesday at $1,242.24.
Expedia
This online travel leader could be poised for a potential big third-quarter report. 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 finally is starting to match Priceline’s growth metrics. The company has raised the dividend and is buying back stock, and both are shareholder-friendly actions.
Jefferies noted this when discussing the outlook for the third-quarter results:
We expect investors to focus on Vrbo and trivago, looking for improving trends, along with potential commentary on expectations beyond fourth quarter 2019 against softening global macro trends. We believe that continued strength in Core OTA, return to growth for trivago and favorable exposure should help top-line growth in the second half while operational streamlining and remaining marketing spend efficiencies should still help margins.
Investors receive a 1% dividend. The $170 Jefferies target price is well above the $149.10 consensus price target. Expedia closed Tuesday at $137.25.
24/7 Wall St.The huge social media leader has been volatile this year after the disclosure of user data being compromised, but it absolutely blew out earnings last quarter. Facebook Inc. (NASDAQ: FB) is the largest social network, with over 2.0 billion monthly active users and over 1.5 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.
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A stunning 88.7% of managers have the social media giant in their portfolios, and despite the recent issues, there is no reason to think many will be selling their shares. Jefferies remains positive and noted this when discussing upcoming numbers for the quarter:
We like the set-up into the third quarter print, as most investors are already expecting constant currency growth rates to decelerate for the remainder of 2019 and the first half of 2020. This quarter the Street is modeling 26% year over year revenue growth, or 3% quarter over quarter growth, which implies the lowest sequential third quarter growth rate Facebook has ever reported. At 19.3x fiscal 2020 EPS, we believe valuation embeds a lot of pessimism with the stock now trading near its largest historical discount to the NASDAQ.
Jefferies has a $250 price target, while the consensus target is $217.85. The shares closed at $188.89 on Tuesday.
Wix.com
This company rounds out the four favorites the Jefferies team likes going into the third-quarter results. Wix.com Ltd. (NYSE: WIX) is a free alternative to businesses and individuals without the huge financial resources to hire a professional web designer or the programming knowledge to build a webpage on their own.
The company has invested heavily in a proprietary website editor tool and has prebuilt templates, graphics, images and fonts that make it easy for anyone with basic computer skills to create a web page. The company now has over 148 million registered users and generates revenue from its 4 million premium subscribers.
The stock was hit in the late summer, and the analysts see it as a solid buying opportunity:
Despite the recent correction, we remain positive on WIX’s prospects thanks to: continued penetration of a large total addressable market for website solutions, higher ARPU from cross-sell/up-sell, and improved margin and retention from a shift to upmarket customers. Constant product innovation has driven above market growth and share gains for many years, and we expect WIX’s strategy to continue. We are especially bullish on Corvid, which unlocks the market for web professionals and enables more complex, customized, and higher priced web sites.
Jefferies has set a $175 price objective. The consensus target price is $170, and shares closed at $124.89 most recently.
These four outstanding internet companies are leaders in their specific categories and could deliver consensus-beating results when they report later this month. While much better suited for aggressive growth accounts, these large-capitalization behemoths certainly aren’t going away anytime soon, so that reduces some risk.
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