RBC Capital’s Mark Mahaney Sets Expectations on Facebook Inc (FB), Amazon.com, Inc. (AMZN), Twitter Inc (TWTR), and Netflix, Inc. (NFLX)

Top analyst Mark Mahaney at RBC Capital is out with a research report highlighting four key players in his large cap internet stock coverage before they deliver fourth-quarter earnings: Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Twitter Inc (NYSE:TWTR), and Netflix, Inc. (NASDAQ:NFLX).

Mark Mahaney has a very good TipRanks score with a 72% success rate and he stands at #21 out of 4,347 analysts. Mahaney garners 15.1% in his annual returns. When recommending FB, Mahaney earns 18.7% in average profits on the stock. When suggesting AMZN, Mahaney realizes 38.6%. When rating TWTR, Mahaney yields 6.0%. When advising NFLX, Mahaney gains 38.6%.

Facebook: Ad Revenue Deceleration Ahead, But Large Revenue Growth Drivers Still Strong

Facebook is expected to report fourth-quarter financial results for 2016 after the market close on February 1st. Outlining a largely bullish earnings preview, the analyst reiterates an Outperform rating on shares of FB with a $170 price target, which represents a 36% increase from where the stock is currently trading.

For the fourth quarter, Mahaney calls for revenue of $8.44 billion, non-GAAP EBIT of $5.12 billion, and non-GAAP EPS of $1.33. Comparatively, the analyst is just under consensus expectations of $8.48 billion, but slightly ahead of the consensus projection for non-GAAP EBIT of $5.09 billion as well as non-GAAP EPS of $1.33. Overall, the analyst tends to agree with the Street, finding the estimates “reasonable,” though he adds, “FX has likely tapered down any material upside opportunity.”

Since the social media giant’s management team first indicated after its third-quarter results that Ad Revenue growth would decelerate “meaningfully” this year as Ad Load drives Core Facebook growth less and the declaration of 2017 as an “aggressive” year for investments, shares have taken a hit.

Mahaney’s take? “Our response: 1) We view this commentary as very consistent with prior management commentary; 2) The Street is already modeling 20 pts of Ad Revenue decel in ’17, and we think that is actually overly ‘meaningful;’ 3) We believe FB still has several new large revenue growth drivers (Instagram monetization, Video Ad innovations, Messaging Platform monetization); & 4) We believe that’s FB’s current low market shares — 15% of Global Online Advertising & 5% of Global Total Advertising – will help it maintain premium growth for a long time,” the analyst opines.

“On valuation, we view current levels – 21x P/E on our ’17 EPS of $5.60 as trough-like, especially for 30%+ EPS growth. Our analysis shows FB close to its lowest multiple ever. So you have here the ‘Net Sector’s Best Fundamentals @ Trough Valuation,” Mahaney concludes.

TipRanks analytics exhibit FB as a Strong Buy. Out of 37 analysts polled by TipRanks in the last 3 months, 34 are bullish on Facebook stock while 3 remain sidelined. With a return potential of 25%, the stock’s consensus target price stands at $155.97.

Amazon Web Services: Biggest Mix Shift Tale in Today’s Tech-Verse

With Amazon delivering a fourth-quarter print by the end of this month, Mahaney sees the e-commerce and online auction leader in solid standing even facing Trump’s election into office. As such, the analyst reiterates an Outperform rating on AMZN with a price target of $950, which represents a 19% increase from where the shares last closed.

For the fourth quarter, Mahaney projects $4.0 billion in revenue, $1.07 billion in GAAP operating income, and $1.31 in GAAP-EPS, noting that though his expectations for revenue fall short of consensus, the forecast reaches ahead of the mid-point of management’s guidance. Meanwhile, the analyst’s Operating Income projection is also under consensus, although “toward the top end of guidance.” The analyst’s expectations for GAAP EPS are shy of consensus at $1.40. Previewing the results, the analyst assesses “greater than normal risk” to Amazon achieving Street estimates, as well as looking ahead to the first quarter of 2017 amid material foreign exchange (FX) swings. This concern arises in spite of indications of robust Online & Amazon demand trends that circled during the holiday season.

Mahaney notes, “Despite recent stock underperformance (in part due to the Trump Trade), we view the long-term Long thesis as very much intact. AMZN’s North America and International Retail revenue growth rates are extremely consistent and inherently very impressive. And the investments that are depressing margins – Video, Fulfillment, India – are very likely to further sustain these growth rates long-term.”

Moreover, “Then there’s AWS, which is growing faster and scaling profitability more quickly than we and the market thought possible. This is the Biggest Mix Shift Story In Tech Today – 10% of revenue (AWS) growing 2X faster with 10X the margins as Core Retail. Big Picture — a) Amazon’s two key end-markets (Retail and Cloud Computing) are still only ~10% penetrated; b) Competitive Moats around AMZN are deepening; and c) Amazon’s execution is excellent,” Mahaney contends.

TipRanks analytics demonstrate AMZN as a Strong Buy. Based on 32 analysts polled by TipRanks in the last 3 months, 30 rate a Buy on AMZN stock while 2 maintain a Hold. The 12-month average price target stands at $953.48, marking a nearly 20% upside from where the stock is currently trading.

Twitter: A Warning to “Hold On To Your Eyeshades”

Mahaney is providing bearish insight on Twitter while looking ahead to its fourth-quarter print, likely to be released at the end of this month.

Mahaney remains apprehensive on the struggling social media platform, highlighting his main concerns, “1) It’s not clear when/if product/UI changes can sustainably stabilize or reaccelerate User & Usage growth. 2) Channel checks and our last 4 surveys don’t provide convincing evidence that a substantial number of advertisers will commit meaningful $s to TWTR. Twitter believes it can command premium ad pricing, but its dramatic Ad Rev deceleration doesn’t support that. We have believed that Twitter’s lack of real-time commercial intent (a la Google) and detailed, authentic profiles (a la FB) will eventually limit growth. That is clearly happening now – we see mid-single digit revenue growth for TWTR in Q4 and ‘17.”

However, the analyst plays devil’s advocate, underscoring, “That said, we see TWTR aggressively experimenting with its product, and that’s the right thing to do. And we continue to believe an M&A exit is plausible, just not likely in the n-t nor near current valuation.”

Ultimately, the warning signs remain flashing and clear to the analyst, whose counsels to treat stock-based compensation (SBC) as a “real” expense. With that under consideration, “[…] ’17 EBITDA goes from $796MM to $162MM, which means TWTR trades at – hold on to your eyeshades – 65X EV/EBITDA,” Mahaney surmises.

Therefore, the analyst reiterates an Underperform rating on shares of TWTR with a $14 price target, which represents a 19% downside from where the stock is currently trading.

TipRanks analytics indicate TWTR as a Hold. Out of 21 analysts polled by TipRanks in the last 3 months, 6 are bullish on Twitter stock, 11 remain sidelined, and 4 are bearish on the stock. With a return potential of 3%, the stock’s consensus target price stands at $18.10.

Netflix, King of Dominant Subscriptions: A Story Where International Profitability Meets Universal Appeal

Netflix is set to release fourth-quarter earnings on Wednesday, January 18th, and for Mahaney, it’s full steam ahead for the online streaming giant, where it has reached a massive lead over rivals in the race for dominant subscriptions. As the analyst outlines his confidence on the stock in anticipation of its quarterly results, he reiterates an Outperform rating on NFLX with a price target of $150, which represents a 15% increase from where the shares last closed.

For the fourth quarter, Mahaney forecasts NFLX to bring in $2.47 billion in total revenue coupled with $0.13 in GAAP EPS, which aligns with Street projections as well as the giant’s EPS guidance. Additionally, the analyst calls for $1.46MM in Domestic Streaming Sub Adds, a little over the Street’s estimate of $1.44MM, and 3.75MM in International Streaming Sub Adds, a hair above the Street’s expectations for 3.74MM.

However, the analyst sees tough waters ahead for the first quarter of 2017 in terms of NFLX’s International comp when taking into account the sizeable rollout in the first quarter of 2016.

Furthermore, Mahaney points out “strengthening $” as well as the President-elect’s policy changes that await in 2017 as potential variables for shares, although predominantly, he believes, “[…] the market will mostly focus on International Sub Adds, and we aren’t expecting a material change in NFLX’s bandwidth cost structure anytime soon.”

Overall, the analyst’s bullish perspective boils down to six key points: “1. Dramatic Secular Shift away from Linear TV (1B pay TV subs today) to Internet TV (perhaps 100MM subscribers today) – these nums could swap places; 2. Netflix is the Dominant Subscription Leader – perhaps 8X more subs than the closest competitor…and this is a scale game; 3. Netflix proving out U.S. Profitability – Contribution Margin rising from 16% in ’12 to 36% in ’16; 4. Netflix proving out Universal Appeal – 10% household broadband penetration within 3 years in every market launched; 5. Netflix proving out International Profitability – Pre-’14 Markets scaling like U.S. did – approx. 20% contribution margin on 25MM subs; & 6. One of the Best Management Teams on the Net,” Mahaney affirms.

TipRanks analytics show NFLX as a Buy. Based on 35 analysts polled by TipRanks in the last 3 months, 19 rate a Buy on NFLX stock, 12 maintain a Hold, and 4 issue a Sell. The 12-month average price target stands at $127.39, marking a nearly 2% downside from where the stock is currently trading.

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