Canaccord analyst Michael Graham may be bullish on FANG titans Facebook Inc (NASDAQ:FB) and Amazon.com, Inc. (NASDAQ:AMZN), after seeing six months of these companies massively outperforming the S&P, but Alphabet Inc’s (NASDAQ:GOOGL) growth prospects and historically high multiple have the analyst moving to the sidelines.
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, Graham is ranked #191 out of 4,574 analysts. The analyst has a 60% success rate and yields 11.3% in his yearly returns. When recommending FB.
Facebook’s Multi-Faceted Revenue Growth Story Is Compelling
Facebook has a compelling arc ahead for revenue opportunities, between Instagram, video advertising, and a high-paced innovation that Graham sees as a big win for the social media titan, bringing a fire storm of advertising inventory and user impact possibilities. In fact, just Facebook Video alone could bring roughly $2 billion for the year to the table, even if that entails a gross margin that is “significantly lower.”
As such, the analyst reiterates a Buy rating on shares of FB with a $175 price target, which represents a just under 18% increase from where the stock is currently trading.
For those who question whether Snap presents a threat, the analyst argues these contrasts might actually prove positive for the stock, explaining, “FB should continue to power through consensus estimates with a hefty tailwind from Instagram and may benefit from SNAP comparisons.”
True, monthly active users (MAUs) escalated 17% year-over-year in the first quarter, but daily active users (DAUs) rose at an even more heightened speed, reaching 17.7%, which to the analyst mirrors better engagement rate in both respects “even higher” to 66.3%. “This has been expanding steadily over time and should be the primary way to combat moderating ad load in the future,” continues Graham.
What of concerns with management having investors holding onto their seats out of fears of expected sluggish ad load growth, which would translate to “a less meaningful driver of ad revenue?” The analyst believes with Instagram and Facebook Video at just the beginning of their “revenue contribution,” anticipating approximately $3 billion in advertising revenue for 2017 from Instagram, all signs point to an encouraging trajectory for the titan.
Ultimately, “[…] we believe Instagram and video ad impressions could help mitigate the impact. We believe Instagram Stories ads are not included in management’s ad load growth guidance, and that it could be a major lever in raising the ad load over the next few years. Additionally, the mix shift toward more video impressions in News Feed could also mean that while total ad impression growth is slowing, more premium and higher priced video ad impression growth is actually much faster,” Graham concludes.
TipRanks analytics show FB as a Strong Buy. Out of 33 analysts polled by TipRanks in the last 3 months, 31 are bullish on Facebook stock while 2 remain sidelined. With a return potential of 14%, the stock’s consensus target price stands at $171.32.
Amazon Gets a Price Target Lift
Amazon’s eCommerce growth does not appear to be slowing down any time soon from the eyes of Graham, who not only continues to cheer the online auction and e-commerce giant, but is boosting long-term gross margin projections “considerably.” Moreover, the analyst reiterates a Buy rating on AMZN while boosting the price target to $1,200, which 25% increase from current levels. By 2021, the analyst anticipates Amazon will hit a gross margin of around 42%, a rise from last year’s approximate 36%.
The analyst predicts firstly, “Prime flywheel should keep eCommerce growth rates high,” and secondly, “Scale and volume increases should drive AWS growth and lead to manageable competitive environment,” leaving him making a strong bullish case for the giant.
Graham expresses, “Our framework for key AMZN model drivers has not changed much since we first published it in June 2015. Most of the major trends within Amazon’s business have either been sustained or have accelerated.” Likewise, the analyst pins his convictions to Prime’s compelling opportunities, as he believes, “Prime build points to higher international users at lower monetization rates.” This especially rides on back of Jeff Bezos’ confidence in the Prime program, as the CEO noted his objective to render it “‘irresponsible’ not to be a Prime subscriber,” which would make about $8 per month quite a cost-effective deal indeed.
Moving forward, “Internationally, near-term penetration gains should depress realized prices modestly in 2017 and 2018 as new users join at low rates, but we expect prices to bounce back as users come off of discounted rates while prices are potentially increased in some nations,” surmises Graham.
TipRanks analytics demonstrate AMZN as a Strong Buy. Based on 32 analysts polled by TipRanks in the last 3 months, 29 rate a Buy on Amazon stock while 3 maintain a Hold. The 12-month average price target stands at $1,109.41, marking a nearly 14% upside from where the stock is currently trading.
Alphabet Has Canaccord Newly Cautious
While Alphabet’s valuation has impressed throughout the course of two years, Graham worries that the tech giant is circling its “outer bounds” with the stock trading at “historical ranges,” and anticipates gross margin has a probable, albeit subtle dip ahead in the upcoming two years. Even if not “a dramatic difference,” the analyst believes the chances for upside have now been narrowed.
In reaction, even though it is likely for core revenue growth to nonetheless hover over 20% for 2017 and “this year is fine,” the analyst downgrades from a Buy to a Hold rating on shares of GOOGL with a $1,000 price target, which represents a close to 6% increase from where the stock is currently trading.
The real concern for Graham lies in the ability to sustain these results, as he contends, “We think much of the growth over the past two years is due to ad load increases on mobile search and YouTube, which (especially the former) will be hard to repeat; • Our refreshed detailed segment analysis suggests firmly that consensus gross margin estimates are too high, and while revenue growth mostly makes up for this, we believe this limits the potential for upward EPS revisions; and • GOOGL’s P/E multiple of ~24x is expensive by historical standards, and puts the stock within a pitching wedge of our $1,000 price target. • CAVEAT: If tech sells off, GOOGL as the defensive stock in the group would likely outperform in the short term and make this call appear too early.”
TipRanks analytics indicate GOOGL as a Strong Buy. Out of 24 analysts polled by TipRanks in the last 3 months, 19 are bullish on Alphabet stock while 5 remain sidelined. With a return potential of nearly 11%, the stock’s consensus target price stands at $1,071.19.