Top analyst Michael Graham at Canaccord is highlighting two internet heavyweights ahead of a fresh round of earnings, putting his chips behind Amazon.com, Inc. (NASDAQ:AMZN), but gingerly hedging all bets on Alphabet Inc (NASDAQ:GOOGL). Amazon’s compelling long-term growth places it as a stock favorite for Graham, but when it comes to Alphabet, the analyst keeps a wary eye on the company’s ability to sustain revenue momentum down the line.
Michael Graham has a very good TipRanks score with a 61% success rate and a high ranking of #147 out of 4,703 analysts. Graham garners 15.1% in his yearly returns. When recommending AMZN, Graham realizes 26.5% in average profits on the stock. When suggesting GOOGL, Graham yields 21.0%.
Let’s explore Graham’s bullish quarterly preview for Amazon, and why Alphabet continues to be left on the sidelines:
Amazon Has the Most Attractive Long-Term Gains of the World Wide Web
Amazon’s long-term prospects has Graham singing the online auction and e-commerce leaders’ praises ahead of its third quarter print due this Thursday evening. Of all the internet players, Graham’s bet is that Amazon time and time again exhibits “the most robust long-term growth opportunity.”
One key aspect that has captivated the analyst’s attention for the quarter points to the company’s domestic e-commerce margin, especially considering that a second quarter deflation sent shares on a dip, but the first quarter’s contraction boded positively for the stock. When looking at sentiment as a whole, Graham believes it is “positive,” weighing in the company’s corner “as most investors don’t seem to mind as long as Amazon continues to be the ‘black hole’ of retail, hoovering up market share incessantly.”
Graham contends: “Domestic eCommerce, driven by the Prime bundle, seems to be still early in its evolution, even as the company begins to gain traction in previously difficult categories like apparel and grocery (the latter from bolt-on acquisitions). Internationally, the story is mostly about investment, and the pace of payback in India and other geographies will become increasingly important in 1-2 years. Meanwhile, AWS seems to have settled into a sustainable competitive situation relative to Microsoft and Google, and we expect growth to remain high for the foreseeable future. Longer term, we think Amazon can continue to internally incubate large, scale-based businesses (like it did with AWS), and expect third-party shipping may be next.”
Confident on the company’s growth outlook, the analyst reiterates a Buy rating on AMZN stock with a price target of $1,200, which represents a close to 22% increase from where the stock is currently trading.
Wall Street backs Graham’s bullish perspective on the e-commerce king, as TipRanks analytics indicate AMZN as a Strong Buy. Out of 32 analysts polled by TipRanks in the last 3 months, 30 are bullish on Amazon stock while 2 remain sidelined. With a return potential of nearly 22%, the stock’s consensus target price stands at $1,198.93.
Alphabet’s Gross Margin Is Cracking
Alphabet’s first two quarters this year brought “largely positive results,” Graham acknowledges, but considering even then, the reaction to the print was “muted” at best, he continues to play it cool when it comes to taking the Google gamble. In fact, the analyst believes that the very powerful tools in Alphabet’s back pocket – predominantly mobile search, YouTube, DoubleClick, and hardware – are the very contributors to the unraveling of the company’s gross margin.
The analyst maintains a Hold rating on GOOGL stock with a $1,000 price target.
Graham explains, “Google continues to dominate search, and we think core revenue growth should stay above 20% for this year. However, we believe growth is likely to experience tougher comps as we head into next year; and while we don’t expect excess volatility from GOOGL stock, we prefer some of our other large cap Internet names with more robust growth setups. In particular, we are cautious about Google lapping its robust mobile ad inventory growth from the last two years and think future ad load increases will have diminishing marginal effects on revenue. Secondarily, gross profit is likely to face pressure from the adverse revenue mix as lower margin segments grow at a faster pace.”
When comes to properties revenue growth, a key to the company’s quarterly performance from Graham’s viewpoint, the analyst concludes with tentative perspective: “Though management hasn’t disclosed the size of its mobile advertising business for several years, we believe it is somewhere around half of total advertising revenue now. However, we are somewhat cautious in the near term because of the impending growth comp of two consecutive years of added mobile search inventory.”
90% of Wall Street disagrees with Graham’s decision to play it safe on the tech titan, considering TipRanks analytics showcase GOOGL as a Strong Buy. Based on 30 analysts polled by TipRanks in the last 3 months, 27 rate a Buy on Alphabet stock while 3 maintain a Hold. The 12-month average price target stands at $1,108.82, marking a 10% upside from where the stock is currently trading.