Canaccord’s Q3 Run-Up on 3 Internet Giants: Amazon.com, Inc. (AMZN), Alphabet Inc (GOOGL), Facebook Inc (FB)

Between the three, Michael Graham says AMZN's the favorite, GOOGL is not a sure bet, FB's monetization primed for growth.


Canaccord analyst Michael Graham is out with a third quarter preview, ranging one-part caution and two parts bullish for three stocks leading the technology leaderboard: Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOGL), Facebook Inc (NASDAQ:FB).

Which tech mogul has the most compelling long-term gains prospect at hand? Which player merits the most caution in the kingdom of internet stocks? Which platform is an internet darling among young teens and keeps spinning its innovative evolution wheels to more growth opportunity? Let’s dive in (To watch Graham’s track record, click here):

Amazon’s Short-Term Margin Concerns Offset by Long-Term Prospects

Amazon seems to be a favorite stock pick for Graham, who believes that of all the internet players, this online auction and e-commerce leader’s momentum looks most enticing down the line. The main risk Graham pinpoints lies in Amazon’s domestic e-commerce operating margin growth that saw an annual dip on the comp, causing pressure to shares in the second quarter. With a rising risk factor considering “lack of margin visibility,” the analyst keeps his eyes on this as a short-term concern, noting this is merely the beginning of the story. Yet, the bigger picture for Amazon is one that lends itself to long-term success.

With the company’s third-quarter print anticipated by the end of the month, the analyst reiterates a Buy rating on AMZN stock with a $1,200 price target, which implies a just under 22% increase from where the shares last closed.

Graham surmises: “We continue to see Amazon as having the most robust long-term growth opportunity in the Internet group. Domestic eCommerce, driven by the Prime bundle, seems to be still early in its evolution, even as the company begins to gain traction in previously difficult categories like apparel and grocery (the latter from bolt-on acquisitions). Internationally, the story is mostly about investment, and the pace of payback in India and other geographies will become increasingly important in 1-2 years. Meanwhile, AWS seems to have settled into a sustainable competitive situation relative to Microsoft and Google, and we expect growth to remain high for the foreseeable future. Longer term, we think Amazon can continue to internally incubate large, scale-based businesses (like it did with AWS) and expect third-party shipping may be next.”

Wall Street agrees with Graham that this e-commerce giant is one to watch, as TipRanks analytics exhibit AMZN as a Strong Buy. Out of 33 analysts polled by TipRanks in the last 3 months, 31 are bullish on Amazon stock while 2 remain sidelined. With a return potential of 20%, the stock’s consensus target price stands at $1,185.90.

Here’s Why Alphabet’s Not Worth the Bullish Bet

Alphabet may be a tech titan, and one that reigns with its strong search engine, but once two years pass of back-to-back rising mobile ad inventory, just how far can this company’s Properties revenue grow? These challenging comps have Graham raising an eyebrow, as he explains while this may be a strong empire, Alphabet is simply not his top pick of the large cap Internet players.

As such, with the titan readying to post third-quarter results on October 27th after the bell, the analyst is playing it cool, maintaining a Hold rating on shares of GOOGL with a price target of $1,000.

Graham notes, “Google continues to dominate search, and we think core revenue growth should stay above 20% for this year. However, we believe growth is likely to experience tougher comps as we head into next year, and while we don’t expect excess volatility from GOOGL stock, we prefer some of our other large cap Internet names with more robust growth setups. In particular, we are cautious about Google lapping its robust mobile ad inventory growth from the last two years and think future ad load increases will have diminishing marginal effects on revenue. Secondarily, gross profit is likely to face pressure from the adverse revenue mix as lower margin segments grow at a faster pace.”

In fact, the analyst would not be surprised to see Google underwhelm the Street once more, contending, “Gross margin has contracted y/y for six consecutive quarters and has missed consensus gross margin for nine consecutive quarters. We think another gross margin miss is likely, and it may subdue the stock even with positive top-line numbers.”

Most of the Street is far more confident than Graham’s sidelined stance, with TipRanks analytics showcasing GOOGL as a Strong Buy. Based on 30 analysts polled by TipRanks in the last 3 months, 27 rate a Buy on Alphabet stock while 3 maintain a Hold. The 12-month average price target stands at $1,095.41, marking a nearly 11% upside from where the stock is currently trading.

Facebook Wins Millennial Popularity Contest

Facebook knows how to strategize its growth prospects, thanks to strong assets and “emerging platforms” like Instagram, Messenger, and WhatsApp, says Graham. With video content beginning to be a power segment for the company, and the social media giant a rising phoenix in the beginning days of its monetization potential for its acquired platforms, Graham is not too fazed by concerns of management’s caution sign flashed for a slow-down of ad load growth and revenue for the year.

As Mark Zuckerberg’s brainchild gears up to release its third-quarter print the first of November, the analyst reiterates a Buy rating on FB stock with a $190 price target, which represents a 10% increase from where the stock is currently trading.

Overall, “We continue to believe that Facebook’s multi-faceted growth story is still intact with mid-teens user growth, consistently expanding engagement, and steady pricing expansion (albeit with moderating ad load growth). The platform is still well regarded among advertisers, and further investments in targeting and measurement are likely to keep ad dollars flowing into Facebook budgets. Additionally, adjacent platforms like Instagram, Messenger, and WhatsApp all appear quite early in monetization evolution. Instagram, the furthest along, is effectively competing for more time spent (especially relative to newer, millennial-oriented apps like Snapchat). Though management has signaled slowing ad load growth as a cautionary note for revenue deceleration in 2017, we think Instagram (and more recently Messenger) can open up new sources of inventory and probably lead to upward estimate revisions,” concludes Graham.

Wall Street largely has hit the “like” button on this internet heavyweight, as TipRanks analytics indicate FB as a Strong Buy. Out of 34 analysts polled by TipRanks in the last 3 months, 31 are bullish on Facebook stock, 2 remain sidelined, and 1 is bearish on the stock. With a return potential of nearly 15%, the stock’s consensus target price stands at $197.17.