- Technology stocks have been a beacon of strength in the stock market for much of the 8 1/2-year equity bull market, and a big driver has been internet companies.
- Morgan Stanley has picked six internet stocks that it says will make good investments in 2018.
In 2017, making money investing in tech stocks was an easy proposition.
The S&P 500 Information Technology Index surged 37%, outpacing the next-closest sector by 15 percentage points and nearly doubling the return for the benchmark. Of the 68 companies in the group, a whopping 61 posted a positive return for the year. It was a veritable bonanza of stock gains.
But what about 2018? With stock-picking conditions the ripest they have been since the tech bubble, there are still plenty of money-making opportunities in the industry.
The Morgan Stanley analyst Brian Nowak has put together stock recommendations for the internet sector specifically, weighing a multitude of factors to arrive at six that he thinks could outperform in 2018.
Without further ado, here are those stocks, with an explanation of why Morgan Stanley likes them so much:
Price target: $US77
Stock upside: 13%
Morgan Stanley rationale: “We are OW on GRUB and see the announced acquisitions as smart moves to further solidify its #1 share in a growing online delivery marketplace. On a pro-forma basis, GRUB is 3.5x larger than its nearest competitor with 50% more supply, which we believe better positions GRUB to continue to drive the budding online food delivery industry. We do not expect competitive pressure (particularly from Amazon Restaurants and UberEats) to let up, but see GRUB’s larger revenue base enabling it to scale faster with strong EBITDA and cash flow.”
Price target: $US4.50
Stock upside: 13%
Morgan Stanley rationale: “We are bullish on ZNGA and see them in the beginning of a multi-year turnaround driven by a live services strategy that started with Poker and should translate well with other Zynga IP. Combined with opex discipline with new games to be released in 2H18, we see strong margin expansion and profitable growth for ZNGA 2018 and 2019.”
Price target: $US75
Stock upside: 8%
Morgan Stanley rationale: “We are Overweight ATVI as we think the digital transformation is still early days and will lead to better than expected EPS growth over the next 3-5 years. After a 75% run in 2017, ATVI trades at 26x Consensus 2018 EPS. While not cheap, we note that we are 9% of the street on 2018 EPS and we see multiple drivers of upside in 2018/2019 given strong execution in 2017.”
Price target: $US50
Stock upside: 12%
Morgan Stanley rationale: “After underperforming in 2017, Z trades at historic lows (25x 2018 EBITDA). Our StreetEasy monetisation maths shows a high margin $US300mn revenue opportunity and we think fears over CFPB are overblown. While 25x EBITDA is not cheap, we believe this is an attractive entry point for a high quality asset growing revenue/adj. EBITDA 19%/35% over the next 5 years, and is a category winner in a large and attractive market.”
Price target: $US215
Stock upside: 15%
Morgan Stanley rationale: “We remain positive on FB as we expect continued ad beats ahead even as ad load growth declines in 2018. Core ad load is falling as FB increases its video focus and changes its algorithm to push more long-form video content. In our view, FB ad pricing can materially increase in the auction market to offset slowing ad load growth.”
Price target: $US1,250
Stock upside: -2%
Morgan Stanley rationale: “We are Overweight AMZN and believe the company will continue to grow 20+% with the highest margin revenue streams growing the fastest (subscription, advertising, and credit cards). We believe AMZN will choose to invest gross profit dollar generation over the next few years, but investments will result in increased earnings and cashflow in out years and lead to positive estimate revisions.”
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