Youssef Squali, long an Internet analyst with Cantor Fitzgerald, in April moved to SunTrust Robinson Humphrey, and this afternoon he offered up a raft of initiations of coverage, assigning a Buy rating to Alphabet (GOOGL), Facebook (FB), GoDaddy (GDDY), Amazon(AMZN), Alibaba Group (BABA), Wix.com (WIX), Priceline (PCLN), and Shutterfly (SFLY), a Hold to Twitter (TWTR), eBay (EBAY), TripAdvisor(TRIP), and assigning a Sell rating to Snap (SNAP).
Right up front, Squali acknowledges the group has higher valuations than average, writing that the "SunTrust Internet Index" is trading at "16.5x EV/NTM EBITDA vs. a 5-year rolling average range of 10-18x."
That, he allows, "may cause short-term volatility,” but "a combination of superior growth relative to other parts of the economy, improving margins, and attractive valuations (adjusted for growth/margin prospects) should support demand for higher quality names over time, in our view."
High "high-quality names” are those "with identifiable catalysts at reasonable prices,” and he thinks Facebook, Alphabet, Amazon, Alibaba and Expedia "fit that bill."
"Wix and Shutterfly offer attractive risk/reward profile among SMIDs, in our view."
It’s still “early” in the Internet taking over everything, he writes:
We remain early in the Internet-ization of the global economy, in our view, and see material investment opportunities in large industries including Advertising and Media, Commerce and Travel. Secular growth trends should allow these industries to post strong Y/Y comps, and sustain higher equity valuations for several years to come, despite short-term volatility and a challenging macro environment. Our thesis is predicated on the Internet platform’s fundamental ability to allow for more convenience, lower pricing, greater choice and ubiquitous connections between users, consumers and businesses worldwide.
Digging into some industry details, he sees good growth in online advertising for sometime to come:
The robust rate of growth seen in 2016 has not abated so far in 2017. Market leaders Alphabet and Facebook continued their ascent, growing gross revenues at 23% and 47% Y/Y, respectively in 2Q17. For all of 2017, we estimate that global online ad spend will be up 17.5% Y/Y to $169B, with our 2018 estimate approaching $200B, up 16.6% Y/Y. This compares to a trailing 5-year CAGR of +16.7% (from 2011 to 2016). By region, we expect ad spend in the US to increase 19.6% Y/Y to $85.6B in 2017 (51% of total ad spend) and international to increase 15.4% Y/Y to $82.9B (49% of total ad spend). This level of ad spend puts digital ahead of Print and Radio, and at par with TV, which is an amazing feat considering that it has been only 20 years since the emergence of the platform. These trends point to a continuation of the secular shift of ad dollars to digital, as consumers shift their media consumption online, and as digital formats continue to prove more effective than offline channels (for both consumers and companies).
E-commerce is also bright:
While e- commerce is a $448B+ market domestically (our 2017 estimate), up 15% Y/Y, it accounts for only ~10% of all U.S. retail sales, and for an even smaller share globally. We remain very bullish on the outlook of e-commerce and expect US online retail sales to increase ~14% Y/Y in 2018 and 2019, showing little slowdown from a strong 2016. So far in 2017, this robust growth trend has persisted, as shown in market leader Amazon’s numbers, with gross revenue up 24% Y/Y (FXN) in 1Q17, outstripping industry growth rates and Street estimates for the company. Secular tailwinds have helped this segment achieve consistent mid-teens rates of growth overall in the last few years. Much of this growth is driven by 1) consumers' embrace of online shopping and the rapid rise of mobile commerce, 2) a superior value proposition made up of easy price comparison, choice and fast/free delivery with no-hassle returns, and 3) category expansion and growth in omni-channel commerce, allowing some of the large store-based players to stay relevant. We expect this growth to continue for some time, driven by continued shift from offline to online, and tailwinds from mobile.