RBC Capital’s 3Q Earnings Preview: Facebook Inc (FB), Twitter Inc (TWTR), and Amazon.com, Inc. (AMZN)

Ahead of third quarter earnings, top analyst Mark Mahaney at RBC Capital provided an update on large cap internet stocks in his coverage universe. Four of his top picks include Facebook Inc (NASDAQ:FB), Twitter Inc (NYSE:TWTR), and Amazon.com, Inc. (NASDAQ:AMZN). Dive in to see why the analyst has high expectations for the giants heading into their respective quarterly prints, commending Facebook and Amazon for outperforming the S&P 500, but conversely signaling Twitter as materially underperforming.

As usual, we like to include the analyst’s track record when reporting on new analyst notes to give a perspective on the effect it has on stock performance. According to TipRanks, top five-star analyst Mark Mahaney has achieved a high ranking of #5 out of 4,182 analysts. Mahaney upholds a 68% success rate and garners 22.1% in his annual returns.When suggesting FB, Mahaney realizes 42.7% in average profits on the stock. When recommending TWTR, Mahaney yields 2.9% in average profits on the stock. When rating AMZN, the analyst earns 40.1% in average profits on the stock.

Facebook Inc

Facebook is set to deliver earnings on November 2nd. From the analyst’s perspective, FB remains one of “the best fundamentals on the Internet today, in terms of growth and profitability.” For this reason, Mahaney chooses the social media titan as one of his large cap picks for long-term, particularly on back of his advertiser surveys that indicate “still rising enthusiasm for the platform.”

Meanwhile, Mahaney maintains his optimistic attitude toward Instagram, Messaging, and Virtual Reality (VR) as “greenfield opportunities” and strategic investments on FB’s part.

Ahead of its third-quarter print, Mahaney reiterates an Outperform rating on shares of FB with a $170 price target, which represents a close to 32% increase from current levels.

The analyst projects FB will indicate revenue of $6.99 billion, non-GAAP EBIT of $4.02 billion, and non-GAAP EPS of $1.03, slightly over the Street’s estimates of $6.89 billion, $3.78 billion, and $0.96, respectively. Mahaney notes that his expectations imply 55% year-over-year foreign exchange (ex-FX) revenue coupled with 81% year-over-year non-GAAP EPS growth.

When taking into account his own intra-quarter data points, channel checks, and model sensitivity work, Mahaney believes the Street estimates reasonably with a “modest upside bias, especially further down the income statement.”

As the titan’s user growth continues its upsurge “at a reasonably robust pace off a very large base” and engagement remains “relatively high,” the analyst maintains his upbeat view of FB’s prospects. Mahaney adds, “Facebook had the most positive data of the major platforms in terms of advertisers’ intent to increase spend and continued high ROIs.”

Ultimately, Mahaney surmises, “We see in FB plenty of strong, secular platform growth ahead. In part because FB management is correctly prioritizing the user experience, while developing better solutions for advertisers. […] If there is One Big New Theme here, it’s the Video-ification Of The Internet…and FB is extremely well positioned for this.”

TipRanks analytics exhibit FB as a Strong Buy. Based on 36 analysts polled in the last 3 months, 31 rate a Buy on FB, while 5 maintain a Hold. The 12-month price target stands at $156.60, marking a 21% upside from where the shares last closed.screen-shot-10-13-16-at-02-08-pm

Twitter Inc

Twitter is expected to report its third-quarter results on October 27th. Mahaney refers to the social media platform as “an acquisition speculation rollercoaster,” but notes “relatively ‘high’ Q3 expectations” as a positive upturn from this. In fact, though Twitter has had its struggles, Mahaney underscores a recent trade up of 11%, “largely on reports that it might be acquired,” including Bloomberg and the Wall Street Journal publications fueling the acquisition chatter.

Even so, based on Mahaney’s Spectrum analysis, he deems Twitter one of his top two “riskiest near-term stocks,” and recognizes the possibility for key metrics to underperform. The analyst adds, “Specifically, for TWTR, our intra-quarter survey work shows worsening advertiser spend/ROI trends.” Moreover, though Twitter is trading up, ultimately, Mahaney finds in the overall picture, the company is trading “well below” its historical forward average.

As such, Mahaney reiterates an Underperform rating on TWTR with a price target of $14, which represents a 22% downside from where the shares last closed.

For third-quarter earnings, Mahaney expects TWTR to produce revenue of $606MM, adjusted EBITDA of $148MM, and Non-GAAP EPS of $0.12, compared to the Street’s projections of $605MM, $150MM, and $0.09, respectively.

Mahaney highlights his chief concerns, ranging from a lack of clarity as to “when/if product/UI changes can stabilize or reaccelerate User & Usage” and the fact that his channel checks coupled with his most recent four surveys fail to offer “convincing evidence” that a significant number of advertisers intend to “commit meaningful” money to the company.

As the analyst sees the situation, “Twitter believes it can command premium ad pricing, but its dramatic ad revenue 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 said, we could become more positive on Twitter if it shows meaningful traction with advertisers.”

TipRanks analytics demonstrate TWTR as a Hold. Based on 34 analysts polled in the last 3 months, 5 rate a Buy on TWTR, 21 maintain a Hold, while 8 issue a Sell. The consensus price target stands at $17.94, marking a nearly 1% downside from where the stock is currently trading.screen-shot-10-13-16-at-02-08-pm

Amazon.com, Inc.

Amazon is anticipated to post its third-quarter print on October 27th. Mahaney’s consumer surveys reveal “accelerating Prime FlyWheels in multiple countries & we see ongoing evidence of AWS Price and Product advantages.” Amazon remains one of the analyst’s top large cap long picks as well, as it has been for many years.

As such, the analyst reiterates an Outperform rating on shares of AMZN with a $1,000 price target, which represents just under a 20% increase from where the stock is currently trading.

Mahaney expects the online streaming giant to report $32.6 billion in revenue, $653 million in GAAP operating income, and $0.75 in GAAP EPS for the quarter. Mahaney’s revenue in general mirrors that of the Street and hits over the mid-point of management’s guidance, whereas his operating income projection falls slightly under consensus, but at the top of guidance. Meanwhile, Mahaney’s GAAP EPS estimate of $0.75 is “modestly below” that of consensus at $0.78.

When assessing key factors that will be critical in looking at both third-quarter results as well as fourth-quarter outlook from management, Mahaney asserts that “consistent and material” year-over-year gross margin expansion has proved to be a top significant, primary element in AMZN’s outperformance throughout these last two years. For shares to continue to surge, the analyst contends this trend will need to carry forward, adding, “and we believe it will.”

The analyst opines, “Based on intra-quarter data points, our channel checks, and our model sensitivity work, we believe Street revenue estimates for the quarter are reasonable, with no clear variance to either the upside or the downside, while we see potential upside on the bottom line. In terms of Q4:16 guidance, we view current Street December Quarter revenue and Operating Income estimates as bracketable.”

With full bullish steam ahead, “In short, Amazon’s fundamentals have NEVER been stronger in our view,” Mahaney concludes, thanks to the company’s fundamental end-markets retail and cloud computing markets revealing only 10% penetration and overall “excellent execution.”

TipRanks analytics indicate AMZN as a Strong Buy. Based on 35 analysts polled in the last 3 months, 34 rate a Buy on AMZN, while 1 maintains a Hold. The 12-month price target stands at $924.22, marking a nearly 11% upside from where the shares last closed.screen-shot-10-13-16-at-02-09-pm

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