All the favorite Internet companies have released their latest earnings reports, and Wall Street’s reactions to those reports varied widely. Following the reports, Goldman Sachs sees opportunities in Twitter, LinkedIn, Amazon and a handful of other stocks in the Internet sector.
Goldman still likes Internet stocks
In a report dated May 19, analyst Heath Terry and his team noted that overall, Internet stocks were “roughly flat on average,” with 18 of the 35 Internet stocks they cover trading up the day after the companies reported earnings. They report that the average stock declined 0.6%, although there was a broad range of movement, with Twitter tumbling 26% and Netflix soaring 18% higher. (All charts / graphs in this article are courtesy Goldman Sachs.)
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They continue to like the Internet sector because in the last month, it has performed close to in line with the S&P 500, rising 1.4% compared to the index’s 2% increase. When looking at the year to date, however, the sector outperformed the S&P 500 by 950 basis points.
They also like the sector “on both growth and cash returns basis,” which they think justifies the premium multiple across the sector.
Forex continues to weigh on estimate revisions
The Goldman Sachs team reported that adjusted EBITDA estimates for this year were revised down at 21 of the 35 Internet companies they cover. The average downward adjustment was 1.3%, although like with the stock price performances of Internet companies following their earnings report, there was a wide disparity. They report that the best revision was an increase of more than 20%, while the worst was a decline of 14%.
Revenue estimates were also revised downward due to the strengthening of the U.S. dollar. According to Terry and team, the average revenue estimate revision was a decline of 0.7%. Once again, however, there was a great disparity in revisions, with the worst change being a decline of 15% and the best being an increase of 6%.
On average, the analysts report that guidance for this year reflected a negative impact of one to two percentage points on revenue growth because of currency exchange rates versus the stronger U.S. dollar.
Opportunities in LinkedIn
The Goldman team thinks all of these wide changes in share price and adjusted EBITDA and revenue estimates offers some big opportunities in the Internet sector. For example, they noted that shares of LinkedIn tumbled 19% after its earnings report, while Twitter shares plunged 26% after its report. They think both of these declines mean investors now have an attractive entry point. Interestingly, their view on LinkedIn runs counter to what most firms did following the social network’s earnings report, as many slashed their price targets.
LinkedIn reduced its EBITDA guidance for this year by $160 million, which was why the social network’s shares went into freefall. The Goldman team thinks the current share price of around $193 “creates an attractive entry point” for what they still think is “an extremely valuable network of users.”
They think LinkedIn’s network can support multiple revenue streams and point out that its growth rates are above the industry average. Further, they pointed out that the greatest majority ($130 million of $160 million) of the reduction in guidance was due to deferred write-downs from the acquisition of lynda and changes in foreign exchange rates.
Of course neither of these problems is a long term one for the company.
Twitter’s user growth only a temporary problem
Twitter shares plunged as a result of weakness in ad revenues and the reduction in guidance. The reason for the guidance change was changes in the micro-blogging platform’s direct response ads. Among the changes was how Twitter charges for its Website Card, which is now from cost per engagement to cost per action. This basically means that instead of getting paid for Retweets, Replies, Favorites, Expands or Follows, the company only gets paid per action, which depends on each ad campaign’s objective.
Management also noted continued problems in user growth, but Terry and team thinks these issues will only be temporary. They expect Twitter’s user base to grow significantly as it refines its products to make it easier for users to discover content and for publishers to deliver it.
As of this writing, shares of Twitter were down 2.13% to $36.70 per share.
Amazon soars but still offers opportunity
Even though shares of Amazon gained 14% following the company’s earnings report, the Goldman team also sees opportunity there. It was the second consecutive quarter in which the online retailer has demonstrated continued gains in market share in addition to improvements in margins.
Although the company’s returns on invested capital have fallen in the last three years as Amazon invests in fulfillment and infrastructure for Amazon Web Services, they think this year will “continue to be an inflection point” for Amazon. They expect the online retailer to see stronger revenue growth and better operating leverage due to these investments, thus “driving higher capacity utilization of new fulfillment infrastructure.
As of this writing, shares of Amazon were up 0.14% to $422.31 per share.