Before the earnings dice roll again, top analyst Colin Sebastian at Baird is out with bullish research notes on three internet stocks: Facebook Inc (NASDAQ:FB), Shopify Inc (US) (NYSE:SHOP), and Amazon.com, Inc. (NASDAQ:AMZN) (To watch Sebastian’s track record click here):.
In positive previews ahead of the second quarterly prints for these companies, Sebastian specifically underscores Facebook’s surges in advertising revenue, Shopify’s strong standing on the mid-market leaderboard, and Amazon’s growth irons in the fire that await even following its record-performing Prime Day as reasons to be upbeat ahead of financial results. Let’s take a closer look
Is E-Commerce Facebook’s Way Forward?
As Facebook continues to expand its e-commerce platform and increases spending on Instagram, Messenger monetization, and live video, the social media giant is succeeding on a number of metrics. However, questions over ad load issues continue to rise again and again. Sebastian expects these “increased volumes have the potential to more than offset any pricing related impacts.” According to Sebastian, this offset should allay growth concerns by investors relating to both the company’s gross sales and revenues (top-line growth) as well as fixed and variable costs (operating leverage) over 2017. The analyst maintains that “Facebook remains well positioned to aggregate a disproportionate share of advertising budgets for years to come.”
Despite the lowering of pricing for its newer ad format, Sebastian estimates the giant will bring in advertising revenues of $8.9 billion for the first quarter, which would indicate a 43% year-over-year rise. Meanwhile, with Facebook having just surpassed its 2 billion active user goals, the giant looks robust as ever.
The company has recently placed an emphasis on growing its e-commerce platform to heighten its role in consumer shopping. This is due to Facebook’s unparalleled ability to facilitate quick chat via its instant messenger. According to recent studies 77% of consumers will not shop at an online store without a good chat with 44% calling it their most important feature. It is for this reason that Sebastian noted that “increasing Facebook commerce is also positive for service providers such as Shopify, Big Commerce, and ChannelAdvisor, which help to power merchant sales. Given Facebook’s massive scale, user engagement, and treasure-trove of data, we believe that Marketplace is a natural extension of the company’s social platform.”
Sebastian estimates Facebook Q2 revenues to reach over $9.086 billion, slightly less bullish than consensus of 9.185 billion. The analyst maintains an Outperform rating on the stock with a $163 price target representing a near 2% upside.
Shopify Moving in a Fragmented Market
There is no question that as other e-commerce software providers like Magento and BigCommerce continue to revamp and improve their platforms and target wealthier consumers, Shopify is shaping up to compete. Sebastian believes that “management remains primarily focused on increasing SMB penetration, with plans to increase headcount/marketing spend for both the Plus and SMB platforms to drive new subscriber growth.” This is in addition to the introduction of Shopify Plus and broadening services and increasing functionalities for its enterprise class. In fact, according to the analyst, these changes are making an impact as about “50% of Plus customers are ‘home-grown’ vs. acquired.”
However, most noteworthy is Shopify’s ability to capitalize on its Facebook and Amazon integration. For instance, as Sebastian points out Facebook Messenger “not only removes friction from the buying process, but it allows merchants to connect more directly with customers to provide personalized services and support.” Furthermore, by integrating with the Amazon sales channel, Shopify sellers can now manage their inventory, while connecting it to Amazon on a singular dashboard.
All things considered, Sebastian expects Shopify 2Q17 results to fall more or less in line with consensus, which leads him to “Remain confident in Shopify’s midmarket competitive position […] Specifically, our revenue and operating income estimates of $144 million (+66% Y/Y vs. +75% in 1Q17) and -$6.9 million are in line with guidance and consensus expectations.” The analyst maintains an Outperform rating on the stock with a $95 price target representing a near 2% upside, while noting that the evaluation is at the “high end of median Internet and SaaS valuations.”
Amazon Making Foray into New Market Share Opportunities
This year’s historic Prime Day, which saw a dramatic rise in order volume (60%) and customer growth (50%) compared to Prime Day 2016 is not the only big news for the e-commerce giant. Sebastian also looked at the company’s rapid expansion into five “mega-categories” like Clothing/Accessories, Home & Kitchen, Health/Beauty, Grocery, and Office Equipment/B2B.
The analyst found that until now Amazon only had less than a 5% market in each of these categories, which total at a potential of about $2 billion market share. Sebastian is confident that Amazon can close the gap “due to an increasingly loyal customer base (Prime), increasingly sophisticated fulfillment and logistics network, and the increasing adoption of online shopping across traditionally bricks-and-mortar product lines.”
As Amazon turns increasingly to heavy investments in transportation/logistics infrastructure, Prime Now expansion, digital content and cloud services, the analyst projects Q2 revenue slightly above consensus at $37.4 billion vs $37.2 billion, which represents +23% growth year over year. Also notable is the increase of mobile ordering, which is beginning to replace desktop ordering. This certainly serves the interest of the online auction and e-commerce giant, as ordering is now even more accessible to its clientele. As e-commerce trends remain strong, Amazon is poised to be “a key beneficiary”- even if that does lead to short-term margin constraints as the company keeps its aim set on investing in growth segments including Amazon Web Services (AWS), logistics, as well as in India.
Looking ahead, “Importantly, there is established precedent for materially higher shares for market leaders within these categories, and as such, we still see significant runway for growth for Amazon’s Retail segment,” concludes Sebastian, who reiterates an Outperform rating on the stock with a $1,100 price target representing a 10% upside.