Internet stocks underperformed the broader U.S. market in 2019, as investors grew disheartened by the lack of profitability in newly public growth companies, and some of the premier large-cap tech companies began to mature.
But several analysts are still quite bullish on the internet sector. Some large tech players are developing new growth drivers and trade at historically low valuations, and some of the currently money-losing, recently public companies show signs both of strength and profitability.
A team of Canaccord Genuity analysts wrote in a note Tuesday evening that they see digital advertising-related and ride-sharing stocks as particularly favorable.
Here are the analysts' top picks for 2020 and what the key arguments for each are:
Facebook, $260 Price Target (22% Upside)
"We see upside to estimates as Stories monetization keeps improving, with only 3 million of Facebook's 7 million advertisers engaging with the format so far," the analysts wrote. The Stories feature on both Instagram and Facebook has been a growth driver for Facebook, as both users and advertisers continue to adopt it. If Stories can drive upside to current estimates, Facebook would exceed current FactSet consensus estimates of 21% revenue growth and 43% earnings per share growth for 2020.
Facebook also trades at just over 23 times 2020 EPS, a historically low valuation, which many analysts say is too low.
The U.S. presidential election could also drive estimates for the year higher, Canaccord said. A majority of political advertising spend occurs on Facebook, the analysts said, although they also noted that the anti-tech positions of some candidates could pressure sentiment on the stock.
Significantly, the analysts said that most of the upside to the current estimates for Facebook would not come from political ad spending, but rather from other sources such as small business spending. "There has been more focus on introduction of new automated ad tools designed to make online advertising more accessible for small businesses," Canaccord said, adding that Facebook is using artificial intelligence to optimize small business' ability to target audiences and to create more efficient bidding processes.
Analysts at Stifel recently upgraded Facebook and Google to buy, citing both companies' ability to maintain or take more market share in digital advertising.
"Facebook likely has the biggest upside to estimates in 2020," Canaccord said.
Etsy, $70 Price Target (52% Upside)
"The new Etsy Ads platform should lead to higher ad budget utilization for sellers, driving more traffic to listings and therefore sales, while Etsy’s focus on brand spend should attract more buyers to the platform and re-engage casual shoppers," Canaccord said.
Etsy also implemented free shipping for all orders of $35 or more, which the analysts see as a longer-term positive. "Etsy’s free shipping initiative should drive gross merchandise sales growth acceleration," they wrote.
Canaccord cautioned, though, that in the short term, both Etsy ads and free shipping "have created certain temporary headwinds to growth as sellers become accustomed to and work through the changes on the platform."
With the lack of visibility, the analysts lowered their price target to $70 from $80, using a multiple on 2020 revenue of 8.9, below the previous multiple of 10. Still, the upside in the base case is significant compared to how most on Wall Street see the broader market performing.
Uber, $50 Price Target (49% Upside)
Uber is showing "a shift from focus on growth at any cost to 'profitable growth,'" Canaccord said. Visibility into profits is perhaps the most important key to Uber's story.
"We currently estimate that Uber will reach adjusted EBITDA profitability by 2021, a year sooner than we had previously expected amidst cost-cutting measures," Cannacord wrote. For 2021, analysts polled by FactSet are looking for Uber to lose $68 million before accounting for interest, tax, depreciation and amortization. But Canaccord is looking for adjusted EBITDA in 2021 of $469 million.
Driving that profit would be what analysts call "price rationalization," or phasing out discounts and cash back rewards to compete for riders. Also, both companies will look to reduce driver insurance expense, which they record as a cost of revenue.
But Canaccord also expects Uber to implement price rationalization with Uber Eats, which is both facing serious competition and very unprofitable.
RBC Capital Markets analyst Mark Mahaney recently wrote in a note he thinks Uber can reach profitability in 2020.
Lyft, $70 Price Target (55% Upside)
Like Uber, Cannacord expects that Lyft will also benefit from "a more rational environment and focus on the rider experience to drive profitable growth."
Lyft is Cannacord's preferred pick in the ride-sharing space, as the firm believe that Lyft's combination of solid rider loyalty initiatives and price increases will bring profitable growth in the coming few years.
Peloton, $37 Price Target (27% Upside)
Revenue more than doubled in 2019, and Cannacord analysts see new products and geographical markets driving long-term growth.
Peloton is now expanding into Germany. Plus, "Peloton could launch new products including a lower-priced Tread and rowing machine, expanding its total available market and potentially attracting more subscribers," the analysts said.