Credit Suisse Says Capital Intensity Leveling Off In Tech Giants, Time To Accumulate Shares

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  • Shares of Alphabet Inc GOOGL, Facebook Inc FB and Amazon.com, Inc. AMZN have been rising over the last one year.
  • Credit Suisse’s Stephen Ju maintained Outperform ratings on all three companies.
  • The extended period of investment in the technology segment is expected to be followed by a harvest period, Ju believes.

Analyst Stephen Ju mentioned that investors are concerned about whether the outperformance of stocks of Alphabet, Facebook and Amazon.com could continue in 2016.

He added that an analysis of the aggregate CapEx dollars deployed sector-wide reveals that the incremental dollars have already “started to moderate,” indicating a harvest period after an extended period of investment.

Ju said that Alphabet, Facebook and Amazon.com remained the top picks, while recommending investing in Mercadolibre Inc MELI, Yelp Inc YELP and LinkedIn Corp LNKD among the small-cap players.

Alphabet

The price target for the company has been raised from $850 to $900. Alphabet is poised to benefit from a faster-than-expected narrowing of the mobile-desktop monetization gap, continued moderation of increases in its capex and the rising contribution of the company’s non-search businesses.

“We have recalibrated our product-by-product model to include YouTube Red,” the Credit Suisse report mentioned, while adding that even a low-single-digit percentage conversion rate from free to paid would boost Google’s annual ARPU.

Facebook

The price target for Facebook was maintained at $135. Ju believes that Facebook is poised for long-term revenue growth without a material lift in its ad loads. The near-term growth drivers are Instagram, Premium Video and DPA.

The Street models continue to underestimate the long-term monetization potential of the company’s upcoming new products, Ju believes. The upside to estimates may be driven by other products including WhatsApp, Messenger and offers.

Amazon

The price target for the company has been raised from $777 to $800. Credit Suisse’s new model which bifurcates Amazon’s financial statements between AWS and e-commerce values AWS at $149 billion, suggesting that the Street is “mis-pricing Amazon’s e-commerce franchise.”

Ju believes that the capital intensity to run AWS, including the capital and financing leases, is already leveling off. He also expects the operating margins of the company’s e-commerce segment to expand due to benefits derived from the moderation of shipping loss.

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Mercadolibre

Ju maintained an Outperform rating for the company, while reducing the price target from $145 to $131. Mercadolibre’s shares are down 28 percent since April 28, 2015 on currency headwinds related concerns.

Ju mentioned that the company is poised to benefit from increased off-platform adoption of MercadoPago, better-than-expected adoption of interest free listings in non-core countries, the resultant increase in ASP and higher take-rates. Mercadolibre’s future performance will also benefit from the adoption of its new Product Listing Advertisement.

YELP

Credit Suisse maintained an Outperform rating for the company, with a price target of $44. Ju believes that Yelp continues to present a unique consumer value proposition and remains a good long-term pick. The company’s revenue and Local Advertising Account growth are driven by sales personnel growth.

LinkedIn

Ju maintained an Outperform rating for the company, with a price target of $330. The company’s increased focus on driving revenue growth in its existing product segment signals a harvest phase. LinkedIn’s growth is expected to be driven by potential operating margin expansion and continued pricing increases in Talent solutions, the analyst added.

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Posted In: Analyst ColorLong IdeasPrice TargetReiterationAnalyst RatingsTrading IdeasCredit SuisseStephen Ju
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