RBC Capital has a surprise for us. 10 surprises to be exact. The Top 10 Internet Surprises for 2019.
The firm explains here: “We attempt to create a list of what would be the biggest surprises for Internet Investors over the coming year, with a “surprise” being an event that the average Internet investor things is highly improbable, but we believe has a reasonable chance (30%+) of occurring.”
Interestingly, given the relatively bearish sentiment right now, the surprises tilt more to the positive than the negative. Here we also include details on the firm’s two favorite Internet large-caps for the year.
It’s also worth noting that the analyst behind this report is Mark Mahaney (Track Record & Ratings). Using TipRanks we can check his stock picking track record. As you can see, he scores an impressive #40 out of 5,100 ranked analysts.
With that insight in mind, are you ready to be surprised? Read on to find out more.
1) FANG Outperforms
FANG (Facebook, Amazon, Netflix and Google) would appear to be deeply out of favor going into 19. “And yet we think the setup is actually quite constructive” says Mahaney.
Fundamental trends for A, N and G have been very consistent and should continue to be in ’19, which should power outperformance. “And F, the problem child, could well achieve fundamental stabilization by H2:19” adds Mahaney.
2) Netflix’s Subscriber Numbers Accelerate
This would be a major surprise, given the recent 40%ish correction in Netflix (NFLX– Research Report) shares – sparked by fears over rival launches (Apple, AT&T Time Warner, and Disney.)
Indeed, the Street is assuming Subscriber Addition declines in both the US and International markets for 2019. Plus a very large subscriber base makes it tricky to maintain acceleration levels.
But not so fast says Mahaney. “We believe that Netflix’s overall consumer value proposition (selection, price, distribution, brand) will continue to power thru in more and more International markets. And having Season 3 of Stranger Things in mid-’19 will likely help…” He has a buy rating on the stock with a $450 price target (68% upside). See what other Top Analysts are saying about NFLX.
3) AMZN’s Operating Margins Are Flat
Two predictions for Amazon (AMZN– Research Report) here. First, the margins. Amazon guided to an extremely unusual Q/Q Operating Margin decline in Q4:18. “We are interpreting that Q4 Margin guidance as a Big Hint by AMZN management that it’s time to aggressively invest again” says Mahaney.
4) AMZN Go Stores Go Physically Viral
Second, the Go Stores. This is a new kind of store with some of the most advanced shopping technology. No lines, no checkout – just grab and go! (i.e. Legal shoplifting) Right now, Amazon has only 9 Go stores in Seattle, Chicago and San Francisco.
“Our experience with the San Francisco Go Store located a few blocks from our office has been mind- altering” comments Mahaney. He sees “a break-thru concept that we believe will be extremely successful AND disruptive to the convenience store ecosystem.”
Mahaney’s buy rating on the stock comes with a $2,300 price target (49% upside). See what other Top Analysts are saying about AMZN.
5) FB’s Revenue Growth Accelerates
RBC acknowledges that it would be improbable for Facebook’s (FB– Research Report) Ad Revenue growth to accelerate in ’19. However potential surprise factors include: faster than expected Stories format monetization, ramped up Messenger & WhatsApp monetization, and accelerated Instagram monetization.
In fact FB is Mahaney’s No 1 large-cap long for 2019. That’s with the stock currently trading at a ‘highly attractive’ valuation.
The analyst sets out his bullish thesis here: “Trading @ 17X P/E on investment-depressed EPS, owner of the world’s 4 largest Social Media & Messaging assets, with one of the top ROI advertising platforms on the Net and a dominant market share (90%+) among Social Media platforms.”
That’s with a $190 price target for juicy upside of 40%. See what other Top Analysts are saying about FB.
6) A New Music Artist “Makes It” With Spotify
“This may be our most aggressive Surprise call” writes Mahaney. The recent 45% correction in Spotify (SPOT– Research Report) shares suggests deep skepticism that this will happen in 2019.
But the fact remains that if you can make it on Spotify, you can make it anywhere… “We have no idea which new music artist will be the one — Country sensation Tommy Tipover or Rap star Yung Blud…– but there will almost certainly be a new artist that goes direct with Spotify and breaks thru.”
And in the meantime, other Gross Margin boosters exist with scaling Ad Revenue, core scale, and a two-sided marketplace. Mahaney’s SPOT buy rating comes with a $200 price target (76% upside potential). See what other Top Analysts are saying about SPOT.
7) GOOGL’s Other Bets Start To Pay Off
Ok so the firm got this call wrong in both ’17 and ’18. However it’s sticking with it as a ‘Surprise Call’ for ’19. “Waymo [GOOGL’s self-driving car unit] finally went commercial in December ’18 in a small section of Phoenix. We expect to see commercial proof points build out in 2019” states the report.
Plus, Alphabet (GOOGL– Research Report) is Mahaney’s No. 2 large cap long for 2019. “Extremely consistent Fundamental Trends, and with pole position against arguably the biggest product cycle in Tech – autonomous vehicles” the analyst tells investors. Indeed, his $1,400 price target for GOOGL works out at 33% upside potential. See what other Top Analysts are saying about GOOGL.
8) Activists Get Active In The Internet Sector
Companies with well-established business models, strong balance sheets, sizeable market opportunities, reasonable valuations, but “inconsistent” execution – these are potential magnets for Activist involvement.
“eBay and Yelp (and possibly TripAdvisor) come to mind, though there are potentially others” is Mahaney’s take on this. (Past examples include eBay and Carl Icahn (2014) and Akamai and Elliott Management (2018).)
9) The Internet Gains A New Dividend Payer
Right now, only two major Internet companies pay a dividend – Expedia (EXPE– Research Report) and IACI (IAC– Research Report).
“We believe the rising cash piles in the sector and maturing growth rates for some companies increase the odds of Dividend Payments.” That’s on top of potentially materially boosted cash piles due to reduced corporate taxes and cash repatriation holidays.
Dividend candidates according to the firm include EBAY, BKNG, and even GOOGL and FB.
10) Crypto/Blockchain Become Scalable And Consumer Adoption Follows
Blockchain and crypto could be highly impactful on large, rent-seeking industries like Personal Data Collection, Financial Institutions, Healthcare, Travel, Real Estate, etc…
Says the firm: “We highlighted this trend in our 2018 and 2019 Outlook Reports. And we still haven’t figured out how this will play out. But we at least have figured out that the financial markets haven’t figured it out either. Which creates the element of surprise…”
Enjoy Research Reports on the Stocks in this Article:
Alphabet (GOOGL) Research Report
Netflix (NFLX) Research Report
Spotify (SPOT) Research Report
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