Susquehanna Financial Group's analysts Brian Nowak and Michael Costantini highlight their top 2014 picks such as Google Inc (NASDAQ:GOOG), Facebook Inc (NASDAQ:FB), Twitter Inc (NYSE:TWTR) and Yahoo! Inc. (NASDAQ:YHOO), as these companies are positioned to overcome investor controversies/debates and post positive revisions while doing it.
With the outsized 2013 multiple expansion behind us, we favor companies positioned to overcome investor controversies/debates and post positive revisions while doing it. In today's note, we begin detailing our top 2014 picks, based on these criteria, starting with large-cap online advertising names, where we prefer Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:GOOG).
Facebook's long-term advertising opportunity
Will slowing ad load growth and declining teen engagement adversely impact the long-term advertising opportunity? The decision to not significantly increase the ad load is a positive long-term move (restricting ad unit supply in an auction model to drive pricing) and Facebook Inc (NASDAQ:FB)'s levers for improved ad units (like video) are set to drive pricing higher. In addition, our video ad model demonstrates how video rev - which is not in our model - can add another 8% to our already above-Street '15E ad rev. And teens may not be using Facebook as much, but they are in rapid growth on Instagram, still a “greenfield” ad opportunity. Positive rating, $68 PT.
Google's EPS revisions
Are the positive ad and EPS revisions from 3Q:13 sustainable? Google Inc (NASDAQ:GOOG) is benefiting from a TAC-favorable revenue mix shift toward Google Websites and our bottom-up Google Websites model shows how this is set to continue into 2014...with more iOS and Android mobile and YouTube growth. We are above 2014 Street estimates and see total net ad revenue growth accelerating to 19% in 2014. We maintain our Positive rating and raise our PT to $1,325 from $1,110.
Twitter's potential and optionality
What's it baking in? We like Twitter Inc (NYSE:TWTR)'s potential and optionality, but the ad unit offerings are still being developed and are in their infancy. And at 19X price-to-sales, Twitter is arguably baking in a 2016E user monetization that is higher than we have Facebook reaching in 2018. Current valuation seems stretched, but the low and noisy Street expectations (we are 9% above Street '14 ad numbers) and uncertainty around what the stock will trade on, keep us from a Negative rating. We raise our PT to $55 (from $38) and remain Neutral.
Yahoo to benefit from Alibaba
How big could Alibaba be? We now value Alibaba at a ~$160bn EV and arrive at a $43 Yahoo price target (from $35 previously). With the core Yahoo! Inc. (NASDAQ:YHOO) business still a share loser, the only source of upside we see is from a higher Alibaba valuation or tax efficiency…neither of which we have an edge on at this point. Maintain Neutral.