It’s the season for making predictions about internet stocks, and Jefferies analyst Brent Thill delivered his outlook for the group on Monday, laying out his top picks for 2021 while adjusting ratings on a few of the companies he covers.
His high-level advice? Investors need to be more selective on the group in 2021 than they were in 2020, when almost everything worked.
Thill notes that the internet stocks he covers on average are trading at 6.5 times next 12 months’ sales, versus a historical average of 4.5 times, and 28.4 times next 12 months’ enterprise value to Ebitda (earnings before interest, taxes, depreciation and amortization) basis, compared with a historical average of 17.8 times.
Thill offers a list of 10 stocks to buy, grouped into two categories—one group he simply calls “top picks,” and the other his “top reopening beneficiaries.”
As part of his broad call on the sector, the analyst also raised his rating on Zillow (Z) to Buy from Hold, while reducing Yelp (YELP) and Upwork (UPWK) to Hold from Buy.
On Yelp, his take is that “uncertainty around timing and shape of the recovery for small local businesses lowers visibility into 2021 at a time when competitors like Facebook and Alphabet seem to be gaining ground.” (Barron’s recently wrote a bullish piece on Yelp, on the theory that it is a an inexpensive reopening play.)
On Upwork, he notes that valuation is near a historical peak, and “appears to embed material amounts of acceleration beyond 20% growth and significant margin expansion, which will require flawless execution.” Zillow, he says, should be a beneficiary of a strong housing market.
Thill rolls his thinking on the stocks into a set of 11 predictions for 2021:
- Regulatory pressure builds on social media stocks, but there are no breakups, leading to “ongoing valuation upside,” and Facebook, Alphabet, and Amazon move higher.
- The best reopening plays are Match (people want to resume dating), travel generally, with Airbnb his top pick, and ride sharing, where he prefers Lyft.
- Facebook is his top large-cap for 2021, on the theory that an advertising rebound, small-business rebound, and push with Shops and e-currency will drive accelerating revenue growth, from 19% last year to 25% this year.
- He remains bullish on e-commerce, and has Buy ratings on both Amazon and MercadoLibre (MELI), “driven by continued e-commerce momentum.”
- In travel, he thinks a focus on “alternative accommodations” will lead Airbnb to outperform Booking.com (BKNG) and Expedia (EXPE).
- For Alphabet, he urges investors to “embrace the oddness,” noting that the stock tends to do better in odd number years. He writes that Alphabet underperformed in 2020, and this year should benefit from a recovery in advertising spend, pent-up demand for Google Cloud, and a “call option” on autonomous driving unit Waymo.
- IAC (IACI) is going to be range-bound in the first half with the Vimeo spin already announced. He thinks IAC will do an acquisition of $1 billion or more in the second half, “leading to the next leg of outperformance.”
- Wix is his top mid-cap pick, “as the constant stream of product innovation fills growing demand for richer web sites” and drives higher average revenue per user.
- Snap, he says, will begin monetizing its mapping feature, potentially adding $1.5 billion in annual ad revenue within the next 3 years.
- Carvana will outperform, he says, “as the used car market continues moving online, assisted by reduced purchase friction and more available inventory.”
- Zillow should outperform “as strong housing demand” drives revenue growth higher at the legacy business, while Zillow Offers “creates an attractive risk-reward by allowing Z to tap into $2 trillion in residential housing transactions.”
In midday trading Monday, Zillow was up 0.8%, to $145.83, while Yelp was off 0.9%, to $32.25, and Upwork was down 1.8%, to $37.33. Of the stocks on Thill’s 10 best list, the biggest daily gainers are Snap, up 3.9%, and Wix, up 2.7%.
Write to Eric J. Savitz at firstname.lastname@example.org