RBC Capital’s Top Stocks for 2019: Facebook (FB), Alphabet (GOOGL), Roku, Inc. (ROKU)

As 2018 is coming to a close, analysts are turning their attention to the new year. RBC Capital analyst Mark Mahaney focuses on the US internet sector, which had a mixed year in 2018 and outpaced the S&P 500 by 2%. While the thought of the internet makes most investors immediately think about the FANG stocks (Facebook, Amazon, Netflix and Google/Alphabet), Mahaney is quick to point out that Facebook underperformed the S&P 500 by 18%, while Alphabet only outperformed it by 2%.

Before we go into details, 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, 5-star analyst Mark Mahaney has a yearly average return of 20.6% and a 62% success rate. Martin is ranked #32 out of 5,105 analysts on Wall Street.

Looking to 2019, Mahaney is bullish on the internet sector. Among his favorite internet stocks are two of those which had the most disappointing 2018 – Facebook (FB) and Alphabet (GOOGL).

While Facebook has had a year full of PR (and investor) nightmares, the analyst expects the company to bounce back as Facebook is “one of the top two ROI advertising platforms” on the internet, which will contribute to continued revenue growth and high margins.

“Momentum Investors can likely avoid FB until maybe H2:19 (when Revenue Growth and EBITDA Margins should stabilize), but Fundamental Investors should focus on an asset trading @ 17X P/E on investment-depressed EPS that owns the world’s 4 largest Social Media & Messaging assets (Facebook, Instagram, Facebook Messenger, WhatsApp). Per our Social Butterflies report, Facebook has experienced only modestly slipping consumer usage and has a dominant market share (90%+) among Social Media platforms,” Mahaney noted.

Mahaney rates FB stock an Outperform with price target of $190, which implies about 36% upside from current levels.

In addition, Mahaney expects Alphabet, Facebook’s main rival in advertising, to also bounce back next year, reiterating an Outperform rating with $1,400 price target.

Alphabet is a “dislocated stock, with extremely consistent Fundamental Trends, and with pole position against arguably the biggest product cycle in Tech – autonomous vehicles, thanks to its substantial investment in Waymo,” Mahaney opined. “TAC growth is moderating, and TAC is arguably the company’s largest structural expense. Regulatory scrutiny ebbing (thanks to FB). And growth at YouTube is possibly inflecting, based on industry anecdotes. GOOGL is also trading adjusting for cash, which we believe is highly, highly reasonable.”

Streaming device maker Roku (ROKU) – which grew more than 40% at one point in 2018 – is also among Mahaney’s favorites for 2019. The analyst expects Roku’s stock to more than double next year, with a price target of $70.

Mahaney stated, “Dislocated stock (off 41% since late August), but with very consistent and very, very robust Platform Revenue Growth (70%+), which is very likely to continue into Q4. With FY19 being the Year Of OTT Launches (Apple, AT&T, Disney), ROKU may well be a key launch pad. At a high level, ROKU is a market leader in a massive and underpenetrated OTT Ad business and in the U.S. Smart TV market. There is no convincing evidence yet that Roku can generate $ billions in ad revenue. But given a base of less than $200MM in ’17 Ad Revenue and a $70B U.S. TV Advertising market, we believe there is convincing evidence that ROKU can sustain very high Platform Revenue growth rates for several years.”


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