RBC's Top 10 Internet Surprises For 2017

2017 is just three days old, yet analysts at RBC Capital Markets have already published a yearly outlook for internet stocks.

RBC's Mark Mahaney published a list of 10 potential surprises internet investors should be aware of. Although the analyst acknowledged that these events are "highly improbable," there is at least a 30 percent chance of them occurring.

1. Trump Administration

Despite President-elect Donald Trump's harsh rhetoric on internet stocks, especially Amazon.com, Inc. AMZN, Mahaney believes no action will be taken.

Amazon is one of the biggest employers in the country and undermining the internet giant "may not help make America great again."

On the other hand, Trump's low-tax and low-regulation thinking will actually be very positive for the internet sector as a whole.

2. FANG Remains A Winner

The popularized "FANG" trade — an acronym to group together some of the leading internet stocks including Facebook Inc FB, Amazon, Netflix, Inc. NFLX and Google/Alphabet Inc GOOG GOOGL — is likely to outperform the market in 2017.

The analyst cited the sustainability of Alphabet and Facebook's top-line growth; operating expenditure discipline at Amazon, Alphabet and Facebook; and accelerated subscriber additions at Netflix.

3. Facebook Expands To China

Mahaney noted that Facebook's expansion into the Chinese market was part of his 2016 prediction, but this didn't happen. This year, it could happen because "stranger things have happened."

Facebook is developing software that could be used to suppress controversial posts — an absolute must to operate in the highly censored Chinese market.

4. Alphabet's 'Other Bets' Pay Off

5. Amazon's Investment Cycle No Longer A Big Worry

6. Netflix Continues To Grow

7. The Street's Outlook On Twitter

8. Alibaba Makes A Major Expansion

9. Yelp Finds A Buyer

10. TV Advertising

Alphabet's "Other Bets" business consists of essentially all projects that aren't part of the company's core offerings. The analyst believes certain products in the unit, such as Nest, home automation and a self-driving car could surprise the market with key milestones.

Amazon continues to heavily invest in key categories and growth initiatives, including Original Video Content, India and physical capacity.

The analyst believes the company has now reached a "point of scale" in which it can make these investments and simultaneously expanding margins.

The Street is modeling Netflix to add 4.3 million net new subscribers in the United States and 12.5 million net new subscribers internationally this year.

Mahaney noted that Netflix could surprise the Street and achieve or beat these figures due to more original content launches, integration with cable providers and a more extensive international expansion compared to last year.

Consensus estimates are calling for Twitter Inc TWTR to grow its revenue by 10 percent this year. However, the analyst believes a 5 percent growth is a more appropriate forecast, and even so, this figure may need to be reduced throughout the year.

Alibaba Group Holding Ltd BABA or another major Chinese internet company will look beyond expanding in Southeast Asia and target a Western country for a major launch.

One possible option on the table would be to expand through an acquisition of eBay Inc EBAY.

Mahaney has been making the case for Yelp Inc YELP to be acquired for quite some time. The company's platform consists of three million local businesses, 135,000 paying local advertisers and over 100 million global unique visitors is attractive for a strategic acquirer.

The topic of linear TV being bought in automated fashion could be a big trend in 2017. Companies such as Trade Desk have been investing in this kind of technology for a few years and now is the time to bring many of the efficiencies of the internet to the largest media platform in the United States.