Canaccord’s top analyst Michael Graham has just published a report giving his take on the upcoming Q4 earning reports for three key internet giants- namely Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL). Intriguingly, Graham is ‘most constructive’ on social media giant Facebook and e-commerce platform Amazon. However, he is ‘nervous’ about potential gross margin contraction for search engine king Alphabet. Crucially, Graham also delves into the most important stories in 2018 for each of these stocks- as we will see below.
According to TipRanks, Michael Graham is a top analyst to track. He has an impressive 62% success rating with an average return of just over 15% for his stock recommendations. As a result, he is ranked as one of TipRanks’ top 200 analysts out of over 4,700. Bearing this in mind, let’s take a closer look at his earnings preview and 2018 outlook for these three mega-cap stocks now:
Facebook will report its Q4 results on January 31
For Q4, Graham is estimating 41% revenue growth and 58% EPS growth. This modest upside should be enough to drive the stock gradually higher says Graham. He notes that ad load may be more moderate, but is confident that pricing and contribution from FB’s very popular Instagram app can more than pick up the slack. Furthermore, he reminds investors that even if FB guides to accelerated expense growth, it has a history of reducing expense growth guidance throughout the year. As a result, he maintains his buy rating and $230 price target on the stock (23% upside potential).
One of the reasons Graham is such a fan of the stock is its ‘multi-layered revenue growth outlook.’ This comes from 1) MAU (monthly active user) growth in the mid-teens; 2) user engagement expansion; 3) ad load growth; and, 4) ad pricing increases. Turning to 2018, he says that even if ad load dissipates, FB can make up for it with its other three growth drivers. He even praises FB’s controversial decision to shift newsfeed content from publishers to people, calling it ‘long-term healthy.’ Furthermore, if the change causes user engagement to rise this could mean an increase in quality time spent on the site. And if in turn this ultimately results in a potential ad pricing lift then FB will actually benefit from its algorithm change.
Indeed, Michael notes that “Despite the total number of hours on Facebook.com declining over the last three years (according to ComScore), the monetization of those hours has increased rapidly (by almost 100% in Q4 according to reported ComScore numbers and consensus estimates).”
Overall, Graham is looking for revenue slightly below consensus of $12.408B along with GAAP EPS consensus of $1.91. For Q4:17, consensus currently stands at $12.506B revenue and GAAP EPS of $1.93.
We can see from TipRanks that this top stock has a ‘Strong Buy’ analyst consensus rating. Indeed in the last three months the stock boasts 29 buy ratings. This is 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.
Amazon is out with its fourth-quarter numbers on February 2 after the close
On the Q4 revenue front, Graham is expecting a ‘banner Q4’ for Amazon leading to ‘a long period of rapid top-line growth.’ In particular, we should expect very impressive holiday earnings. Major hardware launches for Echo, and Fire TV have helped Amazon’s positive momentum while Alexa has made purchases from the Amazon website even easier. While Graham warns that there may be some ‘lumpiness’ in the Physical Stores segment (due to press reported cutting of services and prices at Whole Foods), he is confident that all other segments should grow rapidly- and even accelerate. As a result, Graham is calling for EPS of just $1.27 (vs $1.88 consensus) with higher revenue of $59.777B vs consensus of $59.732B.
For 2018, Graham singles out 3 key stories to focus on, namely: 1) Revenue growth should stay high; 2) there may be increased cloud competition for AWS from Microsoft’s (admittedly much smaller) Azure offering which could lead Amazon to trim AWS prices; 3) domestic margin has continued to contract y/y in recent quarters with Amazon firmly in investment mode (see, for example, big spending on international expansion, fulfilment spending and video content). Crucially, he now expects these contracting North American margins to begin to reverse. But, if not, then Graham warns that 2018-2019 EPS estimates are ‘likely too high’.
Net net, Graham is calling for EPS of just $1.27 with revenue of $59.777B. His revenue is much bullish than consensus of $59.732B. However, consensus GAAP EPS is much higher at $1.88.
TipRanks reveals that Amazon has a stellar overall rating from the Street. It scores a whopping 33 recent buy ratings with just 1 hold rating. However, the average analyst price target of $1,371 suggests only 1.9% upside from the current share price. Graham is in fact much more bullish than consensus and sees the stock hitting $1,500.
Alphabet will report Q4 results on February 1st after the close
According to Graham, the search engine superstar is poised for “more of the same for top-line performance.” Graham sees Properties revenue growing at over 20% due to growth in mobile, YouTube and programmatic. This should be ‘enough to keep sentiment positive’ believes Graham. However, he also strikes a bearish tone in the report in respect of GOOGL’s gross margin saying: “we also continue to believe consensus gross margin estimates remain too high.” This follows through into his Q4 estimates: Graham is expecting GAAP EPS of $9.98 and consolidated gross revenue of $31.865B vs consensus of $9.99 and $32.249B. This follows through into his Q4 estimates: Graham is expecting GAAP EPS of $9.98 and consolidated gross revenue of $31.865B vs consensus of $9.99 and $32.249B.
Indeed, Graham doesn’t mince his words when he states that: “we believe Q4 has the potential to deliver the lowest gross margin in memory as TAC [traffic acquisition cost] continues to grow along with more seasonal hardware related Other COGS [cost of goods sold] in Q4.”
In respect of 2018, Graham is forecasting that core revenue growth will continue at over 20% (although only just). He says this growth will ultimately bring gross margin contraction. But nonetheless he says he is ‘cooling on the name’ due to its historically high trading multiple. He points out that over the last seven years, GOOGL has had an average forward P/E multiple of ~17x. As a result, he has a Hold rating on GOOGL with a $1,100 price target.
On the whole though this ‘Strong Buy’ stock scores big support from the Street. In the last three months, GOOGL has received no less than 18 buy ratings vs just 3 hold ratings. Meanwhile the average analyst price target stands at just over $1,200. With shares now trading at $1,175, this suggests only marginal upside of 2% from the current share price.