Netflix was first out of the gate last week with some impressive numbers to kick off Q4 tech earnings season. The question now is, how will the rest of the FANG gang’s quarterly earnings results fare? Daniel Ives, head of Technology research for GBH Insights published a report packed full of info and insights on what we might expect for Q4 and for 2018 from Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL).
Indeed, the report reveals that Ives is very bullish on the outlook for tech stocks in general in 2018. He says: “We believe the underlying fundamentals, spending environment, and consumer/enterprise landscape looks very healthy heading into 2018 as we expect a robust tech earnings season over the coming weeks.” These positive factors should offset the challenges of a tighter regulatory environment.
Note that this analyst is ranked in the top third of all 4,761 analysts on TipRanks. We can see that Ives scores a 57% success rate and 4.9% average return across his 157 stock ratings. With that in mind, let’s now take a closer look at why he believes these three internet giants are poised to continue the ‘beat and raise’ party:
Facebook reports its Q4 earnings January 31
Ives’ bullish sentiment flows with his take on social media giant Facebook. While the company’s ad growth and monetization strategies are evolving, Facebook is nonetheless ‘executing extremely well in the field’. For Q4, Ives says all key metrics look healthy. He sees ‘modest upside‘ and ‘good enough’ 2018 guidance based on recent checks and GBH Tech Tracker survey work. Ives cites Monthly Active User (MAU) Growth and ad growth as setting Facebook on a ‘trajectory to have another solid quarter in 4Q.’
Indeed, Ives is very impressed by Facebook’s current growth statistics. He says that the ‘MAU growth story remains the fuel in Facebook’s tank’, with fast-growing photo app Instagram the second half of Facebook’s killer one-two punch. In fact, Instagram has already announced 800 million MAUs in September (vs. 700 million in April) making it the ‘golden jewel’ in Facebook’s pocket. Going forward, he predicts ‘healthy monetization and ad growth’ for Instagram in 2018 with MAU likely to exceed 1 billion by the middle of the year.
Despite the hubbub surrounding the recent News Feed overhaul- and its shift in showing less business content- Ives is confident that in the long-term these concerns ‘will be short lived with minimal financial impact.’ However, he does accept that in the near-term this is a major Street worry because of its impact on ad growth- and is looking forward to hearing more details on the company’s conference call.
Another ‘lingering cloud’ is that Facebook has consistently referred to 2018 as an ‘investment year’ with forecasted total expense growth of 45%-60%. Ives acknowledges that the term is ‘never two words investors want to hear’ but says this is a prudent strategy for the stock. Facebook plans to invest significant resources in hiring more employees to 1) tackle issues involving security and 2) flesh out its future video capabilities. Indeed, Ives see investment in video as a very wise move. He is confident that Facebook can generate significant future ad growth from the video medium- and is keeping an eye out for the expected video chat/Portal device at its F8 Developer Conference in May.
TipRanks analyst consensus rating currently has this top stock as a ‘Strong Buy’. That comes as no surprise after the stock’s performance during the past three months. TipRanks shows us an impressive 29 buy ratings for FB compared to just 1 hold rating and 1 sell rating. Altogether these analysts (on average) see the stock spiking just over 16% from the current share price. As for Ives, he is maintaining his $225 price target (18% upside potential).
Amazon.com, Inc. is out with its fourth-quarter numbers on February 2 after the close
E-commerce giant Amazon certainly gets the thumbs up from Ives. He calls the stock ‘highly attractive’ and is expecting ‘strength’ from Amazon ‘across the board’ for Q4. He believes that this strength should translate into 3% – 5% top-line upside when earnings print on February 2. Specifically, very strong holiday sales look likely to give the stock a big boost. Ives predicts that Amazon captured between 45%-50% of the total online holiday sales this past season vs just 38% from 2016. Meanwhile, Prime membership- now at an incredible 88 million- continues to record robust growth. According to Ives, Prime is also likely to beat Q4 estimates.
With that said, he does express some concern that margins could be depressed during the next several quarters. This is due to the need for significant investment around fulfillment, Prime, Echo/Alexa, AWS and the integration of their Whole Foods acquisition. But ultimately Ives balances that sentiment with some pragmatic words about the potential dip in margins calling it, ‘near term pain for long-term gain.’
Looking ahead to 2018, Ives sees ‘eye popping’ momentum for Amazon which will come in handy as it races to keep ahead of other online retailers like Walmart and Bentonville. The Alexa driven Echo devices promise to be a potent arrow in the Bezos & Co. quiver. The GBH team believe that the next generation digital assistant is ‘the tip of the spear’ in what has the potential to be a highly profitable smart speaker market. And Ives is confident that once Amazon’s advanced AI is plugged into more living-rooms, the foundation for Amazon’s perfect ‘consumer flywheel’ will be cemented. In fact, he sees Amazon/Echo and Alexa generating a whopping $20 billion for Amazon over the next three years.
Turning to TipRanks, we can see that Amazon has an outstanding overall rating from the Street with a veritable parade of analysts offering Buy ratings vs just 1 Hold rating. However, the average analyst price target of $1,435 suggests only 2.3% upside from the current share price. Ives comes out more bullish than consensus. He ramped up his price target considerably from $1,375 and now sees the stock hitting $1,500 (7% upside potential).
Alphabet reports Q4 on February 1st after the close
Ives predicts modestly better than expected top and bottom line results for Alphabet’s 4Q. Google’s bread and butter search business showed strength, but ad growth is likely to be the ‘star of the show’. Traffic acquisition cost will also be a key metric to look out for as mobile ad impression success remains a key going forward for Google. YouTube should also play a substantial role in aiding in the acceleration of ad momentum for 4Q and moving into 2018. Ives says, ‘we believe solid 4Q earnings and strong enough 2018 guidance (expecting to be slightly ahead of Street expectations) could be a positive catalyst for shares with much fuel left in the growth tank.’
With more than 1.5 billion users watching an average of 60 minutes a day of YouTube content, Ives foresees YouTube and mobile search revenue playing a key role as a major growth driver over the next twelve months. At the same time, Alphabet hopes to hop onboard the profitable smart speaker bandwagon with ‘Google Home’ and the smart phone market with ‘Pixel’. A recurring theme to Ives research on Alphabet is what he sees as strong tailwinds generated by Google’s unquestionable advertising strength. As a result, he believes GOOGL is set up for a compelling growth story in 2018 and beyond.
Overall, the stock scores a ‘Strong Buy’ from the street with 10 Buy and 2 Hold ratings on TipRanks over the past three months. GOOGL has an average analyst price target of $1,230 suggesting upside potential of 3.61%. Ives himself comes out above consensus with his price target of $1,280 up from $1,190 previously.