Top SunTrust Robinson analyst Youssef Squali is out with a ‘broadly bullish’ report on internet stocks as we head into the print. His confidence comes from two main sources: positive stats for digital advertising via Kenshoo, and for ecommerce via Adobe and comScore. Here we focus on his Q4 take on two of the biggest internet stocks right now- Facebook Inc (NASDAQ:FB) and Alibaba Group Holding Ltd (NYSE:BABA).
Encouragingly, TipRanks reveals that Youssef Squali is a top five-star analyst to track. Indeed, he is ranked in the Top 50 out of over 4,700 tracked analysts. Over his 264 stock ratings, he scores an impressive 74% success rate and 20% average return.
Squali sees Facebook posting strong Q4 results on January 31- with strength across all geographies from North America to Asia. He puts this down to continued improvement in monetization coupled with user growth for FB and Instagram. Specifically, Squali is modelling for Q4 revenue and EPS of $12.68 billion and $2.10. For the whole of 2018 he is looking for $55.34 billion in revenue and $6.72 in EPS. Except for 2018 EPS where he is in line with consensus, Squali consistently comes out higher than the Street in his estimates. We can see that the consensus estimate going into the print calls for revenue/EPS of $12.54B/$1.94. For 2018, the Street is looking for revenue/ EPS of $54.0B/$6.72.
For Squali, strong ad revenue growth is set to drive these results. He is expecting 45% year-over-year growth, placing ad revenue now at $12.5 billion. This growth comes down to two key catalysts explains Squali. First, we have the fact that average revenue per user (ARPU) is up significantly to $5.92 for the quarter, while the total number of users has also soared to 2.15 billion. ARPU is rising due to increased user engagement with a shift towards premium, more clickable Carousel Ads and videos. Popular photo sharing app Instagram is also a big revenue driver with 25 million active business profiles, of which a whopping 80% follow a business. At the same time Squali does not expect operating expenses to decrease as FB continues to invest heavily in security around content and ad quality.
Unsurprisingly, Squali will also be keeping an eye out for any reference to Facebook’s controversial news feed shift. FB CEO Mark Zuckerberg announced earlier this month that it was changing its algorithms to prioritize posts from friends and family over public content. While investors may view this shift negatively (it could cause decelerating revenues), Squali sees this as a savvy move. He says: “In our view, Facebook is making these changes from a position of strength as it is prioritizing long-term user experience and satisfaction over short-term monetization.” Indeed Squali believes that in the long-run the move could actually benefit advertisers as users may end up engaging with the platform in a more active manner.
Squali has retained his $240 price target- placing him above consensus as he is anticipating 26% upside potential. His price target is based on an assumption of 2017-2022 revenue CAGR of 26%, reaching ~$130 billion in 2022 and EBITDA CAGR of ~25% reaching ~$80 billion in 2022.
TipRanks ranks FB as a ‘Strong Buy’ stock based on no less than 29 recent buy ratings. This is versus just 1 hold rating and 1 sell rating in the same time period. Meanwhile, the average analyst price target of $218.41 suggests an upside potential of 16.5% from the current share price.
Alibaba Group Holding Ltd
Chinese e-commerce king Alibaba is out with its fiscal third quarter results on February 1. For the quarter, Squali is expecting revenue of $11,981M (+56% Y/Y), with EPS of $1.79 and EBITDA of $4,900M. In both revenue and EPS he is more bullish than consensus and notes that “weakness in the US dollar relative the RMB should create an FX tailwind in 3Q18.”
Chinese retail growth is very healthy says Squali, as he points to a particularly robust Singles Day performance for Alibaba. Indeed, the company’s hugely successful Singles Day statistics impressed the market- backed by strong Chinese consumer buying, 4x growth in global brands and increased mobile-based shopping. This leads him to boost his revenue estimates for the quarter up to $11.98 billion from $11.55 billion previously. He also expects monetization to show improvement due to tweaks on mobile and desktop, with active user growth also set to increase 11% year-over-year.
Squali also points out that investments are high- hence his lowers EBITDA estimates versus the Street- but also accepts that this comes from a position of strength. According to Squali this is “driven by full consolidation of Cainiao, increased investments in New Retail, international expansion, and content.” In a widely applauded move, BABA increased its stake in logistics company Cainiao to51% from 47% for $807 million. BABA also announced its intention to invest $15.2 billion in the company over the next five years to aggressively expand and strengthen its global logistics network.
Net net, Squali ramps up his price target from $210 to $240 (18% upside potential). He explains that “our $240 DCF-derived PT is based on ~32% revenue CAGR, and long-term EBITDA margin of ~49% by 2024.”
In the last three months, BABA has scored 100% buy ratings. These 18 bullish analysts have a $224.87 average analyst price target- suggesting over 11% upside from the current share price. Like with FB Squali turns out to be more bullish than consensus.