It was only a matter of time before traditional advertising platforms were pushed aside for digital media placed on the internet. How many of the coveted 18 to 34 demographic watch broadcast TV, listen to the radio or read a newspaper? The number is very low, and dwindling every year. The digital advertising era was upon us, and over the past 20 years has continued to grow exponentially every year.
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A new report from Brent Thill, the outstanding internet analyst at Jefferies, makes the case that digital ad growth for the first quarter was very solid. Of course, the big winners were the mega-cap and large-cap internet leaders that dominate the space. Thill does hint at valuation caution and noted this in the report:
Our digital ad checks indicate likely first-quarter revenue beats across our coverage, but much of this could be embedded in the recent year-to-date stock performance. We expect a big beat for our top growth idea, but with the stock trading at 16 times fiscal year 2022 revenue expectations are still elevated.
It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
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Alphabet
The search giant continues to expand, and it was the G in the FANG stocks before changing its name in 2015. Alphabet Inc. (NASDAQ: GOOGL | GOOGL Price Prediction) is a global technology company focused on key areas such as search, advertising, operating systems and platforms, and enterprise and hardware products. The company generates revenue primarily by delivering online advertising and by selling apps and content on Google Play, as well as hardware products. Alphabet 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.
Analysts point to Google Cloud, which is the largest cloud infrastructure play and engages in more technology, infrastructure research and development in headcount and dollars than any other company does. That gives it the strength and wherewithal to compete with and differentiate itself from Amazon’s AWS and Microsoft’s Azure.
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The Jefferies report noted this:
Alphabet has outperformed major indices year-to-date as investor sentiment turned positive. Our checks have been broadly positive, indicating accelerating momentum in the ad business and sustained strength in Cloud. We raise estimates and our price target. The company remains a top large cap pick as we believe it should benefit in 2021 from ad spend recovery, pent-up demand for Google Cloud, and call options on Waymo and other non-advertising initiatives.
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Jefferies raised the price target for Alphabet stock to $2,700 from $2,400. The Wall Street consensus target is $2,383.26, and the shares closed on Thursday trading at $2,252.52 apiece.
The huge social media leader has been on a roll, and the analysts remain very positive. Facebook Inc. (NASDAQ: FB) is the largest social network, with over 2.3 billion monthly active users and over 1.6 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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The company has been under intense scrutiny lately, along with other big-tech giants. Some people allege there has been unreasonable censorship, and it is yet another that may be targeted by either Congress or the Department of Justice, or perhaps both. With that noted, it remains one of the largest and most powerful social media platforms in the world. Jefferies said this:
We believe street estimates of +34% year-over-year revenue growth are too conservative given 1) our checks point to first quarter social ad spend ahead of original plans, 2) the iOS 14 privacy change has not yet been implemented, 3) DR ad spend has remained robust, and 4) stimulus checks and COVID-19 optimism have driven a resurgence in brand spend. We also note that the street’s first quarter revenue estimates unjustifiably represent the largest quarter-over-quarter decline in the company’s ad revenue in public company history (excluding the first quarter 2020 COVID slowdown). In addition to a better-than-expected Q1, we also anticipate positive commentary around eComm initiatives (e.g. the number of users or businesses using Shops) and a lowering of the fiscal year 2021 expense guide to support the stock.
The $350 Jefferies price target was raised to $360, while the consensus target is $339.05. Thursday’s closing share price for Facebook stock was $296.52 a share.
Snap
This is the top growth stock idea at Jefferies, and it reported strong results after the close Wednesday. Snap Inc. (NYSE: SNAP) is a social media company consisting of leading social media platform Snapchat and hardware device Spectacles. Through Snapchat, the company facilitates communication through visual media, enabled by the mobile camera.
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Users are able to share photos, videos and text and are exposed to publisher content from top media companies such as The Wall Street Journal, Vogue, People, MTV and CNN. Advertisers use the platform to promote products, which has a strong reach with the coveted millennial demographic.
Nearly four years after its rocky initial public offering, Snap and its social-media app Snapchat have found their path and then some. Many across Wall Street felt that the earnings would be very strong for the company. Jefferies agreed and noted this before the report:
SNAP has under-performed since sharing its goal of growing rev 50% over the next several years, perhaps indicating they’ve set the bar too high. We are positive fundamentally and anticipate a significant first quarter revenue beat. We raise our revenue estimate to $771 million (implying 67% year-over-year growth), which is 4% ahead of the Street. Similar to its peers the drivers of the revenue beat are 1) checks pointing to higher than expected ad spend, 2) the iOS 14 privacy change delay, but also 3) healthy user activity with our 3P data showing 37% year-over-year growth in downloads. We expect conservative second quarter guidance, but with the company beating the revenue guideance10 of the last 11 quarters we would expect second quarter growth to accelerate versus the first quarter.
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Jefferies hit the target, as Snap shares rose in after-hours trading on Thursday after the company reported first-quarter results that beating Wall Street’s expectations on earnings, revenue and user growth. Snap projects year-over-year revenue growth of 80% to 85% for the second quarter.
The Jefferies price target is $81, which is well above the $74.79 consensus figure. Snap stock closed on Thursday at $57.05, but shares traded up more than 6% in Friday’s premarket.
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Digital ad media growth will continue, and the way to play it is with the industry leaders. Shares of these three top companies are excellent holdings for long-term aggressive growth investors looking to have exposure but who want to stay with tried-and-true leaders that offer better risk profiles.
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