Social Media Pair Trade: Susquehanna Starts Yahoo & Facebook At Positive, Twitter & Yelp At Neutral

In various reports published Tuesday, Susquehanna analyst Shyam Patil initiated coverage of various social media companies.

Patil initiated coverage of Facebook Inc FB and Yahoo! Inc. YHOO with "Positive" ratings while shares of Twitter Inc TWTR and Yelp Inc YELP were initiated with "Neutral" Ratings.

Facebook: ‘Secular Growth Story'

Patil stated that Facebook ($125 price target) offers investors a "multi-year secular growth story" with several "significant" growth drivers.

Patil said Facebook's Core news feed ads remains a key driver while Video is "starting to inflect" which positions the company to become a top online property for video ads. In addition, Ad Tech is growing in importance and leverages identity-based marketing approach to extend its reach and value proposition off-network.

Finally, Instagram is "opening up" and while Facebook is "proceeding cautiously," the platform could become a billion-dollar business next year while WhatsApp and Messenger serve as longer-term plays.

Yahoo: 34% Upside, 16% Downside

According to Patil, a sum-of-the-parts analysis yields a price target of $49 with a "best case" upside scenario of around $60 per share. On the other hand, the analyst's models suggested the downside floor is $31, implying a 34 percent upside potential and 16 percent downside.

Patil said part of his valuation model factors in a 35 percent tax rate on Yahoo's spin of Alibaba Group Holding Ltd BABA even though the company can "likely" find a more efficient approach.

Patil noted that Yahoo Japan's monetization initiatives could add an incremental $3 to $4 per share to Yahoo's stock above the $6 figure the analyst used in his valuation model. Finally, Yahoo's Core is "making progress" and EBITDA may have room to further expand from the company's cost cutting initiatives.

Related Link: Twitter Debate: 'Trapped Buyers' Vs. Takeover Speculation

Twitter: Growth, Engagement ‘Remain Weak'

Commenting on Twitter ($32 price target), Patil stated that the platform's user growth and engagement "remain weak" while management offers "limited visibility" into forward trends. The analyst expanded that user growth has "consistently" underperformed since its IPO while also lagging its peers.

Patil said the weak trends are "going to persist for at least awhile longer" as management hinted the "lackluster" monthly active user growth it is seeing could last a "considerable" period of time.

Switching over to monetization activities, Patil suggested that Twitter's average revenue per user of $5.47 is roughly 56 percent of Facebook's $9.79 and "theoretically" suggests there is room for Twitter to improve.

Yelp: ‘Limited' Near-Term Visibility

Finally, Patil discussed Yelp ($28), noting the company's near-term growth outlook is "murky" and "limited" due to sales force hiring issues and management's decision to phase out its brand advertising.

Patil did however note that over the long-term, management's decision to phase out its brand advertising "was the right decision" but at the expense of negatively impacting near-term revenue and profitability.

On the other hand, Yelp's positioning in the "large" and "underpenetrated" local ad market is a positive and the company should be well positioned to capitalize on growth over the longer-term.

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Posted In: Analyst ColorLong IdeasInitiationAnalyst RatingsTrading IdeasFacebook AdsFacebook MonetizationInstagramMessengerShyam Patilsocial mediaSusquehanna Financial GroupWhatsAppYahooYahoo Japan
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