2014 was an eventful year for internet stocks with many highs and many lows. How will internet stocks fare in 2015? With the New Year right around the corner, RBC Capital analyst Mark Mahaney compiled a list of internet stock “surprises” that could occur in 2015. Mahaney describes a ‘surprise’ as “an event which the average Internet investor thinks is highly improbable, but has a reasonable chance (30%+) of occurring.”
Google (NASDAQ: GOOGL) has not had the best year, having fallen short on earnings expectations for 4 consecutive quarters in a row. Despite this, Mahaney currently has an outperform rating on the stock, believing that Google could begin returning cash to shareholders in 2015.
He noted, “At the current rate, Google could end up having over $80B in cash & marketable securities by the end of 2015. That’s not too far off from the level ($100Bish) when Apple announced that it would begin paying a dividend. And we believe that Google management does pay particular attention to Apple’s activities. So perhaps, Google will begin to return cash. By the way, we believe that such a move would be perceived positively by the markets and plausibly lead to a sustained re-rating of Google shares.”
Mahaney has rated Google 32 other times since June 2009, earning a 73% success rate recommending the stock and an impressive +34.0% average return per recommendation.
Facebook (NASDAQ: FB) saw a large growth in mobile use and revenue in 2014 partly due to the acquisition of messaging application WhatsApp for $19 billion that took place earlier this year and the increase in Instagram users, a photo sharing app Facebook acquired in 2012. Mahaney currently has an outperform rating on Facebook, speculating that the social media website could grow its expense base by about 70% in 2015.
The analyst stated, “FB announced on its Q3 EPS call that it would look to increase its expense base by 50%-70% in 2015. As far as we can tell… nobody believes them. For one, that would imply a material acceleration in its costs growth, which are expected to rise 35% in ’14. And second, the company has previously guided to aggressive opex growth and then trimmed those expectations down over the following quarters. So the Street reaction is that FB is largely being conservative. But given the company’s long-term investment orientation and the inclusion of the WhatsApp and Oculus Rift acquisitions, perhaps the market shouldn’t be so dismissive of the 70% scenario.”
Mahaney has rated Facebook 17 other times since June 2012, earning a 100% success rate recommending the stock and a +59.4% average return per recommendation.
Amazon (NASDAQ: AMZN) has continuously seen a decrease in profit since 2011, recently reporting its biggest loss in more than a decade during its third quarter earnings report. The loss was bigger than expected due to a surge in spending on R&D and product development for items like the Amazon Fire phone, which ended up being a big flop. Mahaney still has an Outperform rating on the stock, stating that he still sees potential in Amazon’s margins to recover and its revenue growth to reaccelerate.
Mahaney continued, “Given AMZN’s current close-to-trough P/S multiple and its +20% 2014 correction, sentiment is clearly negative. In large part, because after four years of investments we haven’t seen operating margins or revenue growth stabilize. But we believe there are a variety of factors that could drive this surprise – the demand-driving impact of faster shipping times, ongoing expansion into the CPG and Fashion & Apparel verticals, the full-year impact of the Prime price increase, easing comps, etc… And we believe that this surprise would be met with a material appreciation in AMZN shares.”
Mahaney has rated Amazon 27 other times since April 2009, earning a 68% success rate recommending the stock and a +18.4% average return per recommendation.
Pandora (NYSE: P) has come a long way in 2014 to improve their profits, such as testing Sponsored Listening, a format that allows users to gain access to an hour of commercial-free music, and the launch of Pandora Artists Marketing Platform, a free service that allows artists and music executives to view a detailed overview of their audience. Mahaney has an Outperform rating on the stock, assuming that Pandora can make a deal with music labels that will allow the company to pay reasonable rates for songs before the end of 2015.
He explained, “Pandora and the Music Labels via SoundExchange are currently going through an arbitration process that is not scheduled to conclude until December 2015. Uncertainty over the rates that will emanate from the arbitration process has been a major overhang on P shares, we believe. Thus, a negotiated conclusion on seemingly “reasonable” terms could be a positive catalyst for Pandora’s stock.”
Mahaney has rated Pandora 12 other times since July 2011, but has not seen a lot of success, earning only a 20% success rate recommending the stock and a -7.8% average return per recommendation.
Twitter (NYSE: TWTR) has had a rough year, hitting its lowest price in May and continuing to report slowing growth rates throughout 2014. Most recently, rumors have been swirling around that Twitter CEO Dick Costolo will be stepping down after he sold all of his Twitter shares from his family trust. Mahaney currently has a Perform rating on the stock with hopes that the company’s monthly average users will reaccelerate, Dick Costolo will remain CEO, and they will gain material traction with advisers.
The analyst noted, “Our thought here is that the market assigns a low probability to all three of these events. And yes, they are linked. But we have seen UI (user interface) improvements drive greater usage at other Internet companies, and it turns out that advertising dollars really do follow eyeballs (e.g. Google). So perhaps the market is being overly negative here.”
Mahaney has rated Twitter 11 other times since November 2013, earning a 63% success rate recommending the stock and a +6.2% average return per recommendation.
Netflix (NASDAQ: NFLX) has had quite an eventful year, producing a slew of original new content and rapidly expanding all over the globe. There is no question that Netflix is on its way to becoming a network in its own right. Mahaney has an Outperform rating on the stock with hopes that Netflix will experience a big increase in U.S. Net Sub Adds in 2015.
Mahaney stated that Netflix has “a relatively large series of Original Content launches slated for 2015, and they could combine to keep U.S. Net Sub Adds north of 5MM in 2015, which we believe would be a positive surprise for NFLX shares…”
The analyst has rated Netflix 28 other times since June 2009, earning a 57% success rate recommending the stock and a +60.7% average return per recommendation.
Mark Mahaney believes these companies will have positive surprises in 2015 and hopes to see the stocks rise significantly. Will these stocks meet Mahaney’s expectations?