Baird’s top analyst Colin Sebastian told investors he remains positive on the internet sector ahead of earnings and noted a few stocks to watch such as e-commerce giant Alibaba Group Holding Ltd (NYSE:BABA) and social media leader Facebook Inc (NASDAQ:FB). The analyst expects strong F2Q results for Alibaba, and in-line to slightly better Q3 results for Facebook.
Before we start, as usual, we like to include the analyst’s trackrecord when reporting on new analyst notes. According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Colin Sebastian has a yearly average return of 23.9% and a 77.3% success rate. Sebastian is ranked #20 out of 4697 analysts.
Alibaba Group Holding Ltd
Although expectations are quite high for Alibaba heading into F2Q earnings, Sebastian expects the e-commerce giant to deliver strong results on November 2. However, while the top analyst anticipates fundamental growth trends to persist through the balance of the year, he sees limited upside in 2H margins as a result of incremental platform spending, continued investments in media/digital content, and the recent consolidation of Cainiao logistics.
Sebastian wrote, “At Alibaba’s June investor day, management provided F2018 (March) revenue growth guidance of 45-49%, and we are encouraged by the company’s success in integrating recent acquisitions (including Youku and Lazada) to supplement strong core retail growth trends. In addition, the company reiterated its long-term goal to roughly double GMV by F2020 to 1Tn USD (up from 547B USD in F2017). The company recently announced plans to invest more than $15 billion in R&D over the next three years, largely focused on the development of AI/ML technology. As the company continues to fund its growth initiatives through strong core retail performance, we continue to believe development of these advanced technologies will remain a sustainable competitive advantage over the company’s smaller competitors.”
As such, Sebastian reiterates an Outperform rating on Alibaba shares, with a price target of $190, which represents a potential upside of 8% from where the stock is currently trading.
BABA has one of the best ratings by the Street. TipRanks reveals that BABA has a Strong Buy analyst consensus rating with 16 back-to-back buy ratings in the last three months. Meanwhile the average analyst price target of $199.40 suggests the stock still has upside potential of just over 14% from the current share price for the next 12 months.
Despite a challenging quarter for Facebook from a “headline” point of view (political discourse), Sebastian sees solid growth in ad spend, as constrained ad load growth may have minimal impact on core Facebook, while Instagram ad spending continuing to ramp (in particular Instagram Stories gaining momentum).
Sebastian wrote, “While our revenue/EPS estimates are slightly below consensus ($9.7 billion and $1.46, respectively), we believe there is upside potential to our model and consensus with intra-quarter checks with service providers and advertisers suggesting healthy growth trends in social media, including outperformance from video and dynamic product ad formats driving slightly better than expected core Facebook growth, as well as the continuing ramp of Instagram monetization (Instagram Stories gaining momentum.). We estimate Q3 Advertising revenues of $9.56 billion (+40% Y/Y) with core Facebook MAUs ending the quarter at 2.04 billion users.”
As such, Sebastian reiterates an Outperform rating on Facebook shares, with a price target of $185, which implies an upside of 5% from current levels.
When it comes to Wall Street’s bet, the odds are on this social media giant, with TipRanks analytics showcasing FB as a Strong Buy. Out of 34 analysts polled in the last 3 months, 31 are bullish on Facebook stock, 2 remain sidelined, while one is bearish. With a return potential of nearly 13%, the stock’s consensus target price stands at $199.