Morgan Stanley: The Biggest Internet Stock Winners From Tax Reform

Congress passed the Tax Cuts and Jobs Act, or TCJA,  commonly referred to as the tax reform act. Against this backdrop, Morgan Stanley looked at the implication of cash repatriation and potential 2018 tax rate changes — the main aspects of the legislation — for internet stocks.

Irrespective of whether the companies choose to repatriate profit held overseas, a 15.5-percent tax on unremitted foreign earnings held as cash and cash equivalents and an 8-percent tax on foreign earnings backed by other assets have to be paid, analyst Brian Nowak said in a Thursday note.

The Beneficiaries Of Tax Repatriation

Priceline Group Inc PCLN and eBay Inc EBAY are best-positioned to benefit from the cash repatriation tax, Nowak said. (See the analyst's track record here.) 

The two companies have the largest store of overseas cash as a percentage of market cap, Nowak said. 

Since the tax on overseas cash is payable over an eight-year period, Nowak said only the first tax payment is due immediately, although all the foreign cash can be repatriated immediately. If foreign tax credits are accounted for, the tax burden for companies with foreign taxable income will fall further, the analyst said. 

"With that as a backdrop, we think that these two companies have the greatest ability to return capital to shareholders with their offshore cash and we look for further signals from the companies on their willingness to do so." 

As of the third quarter of 2017, Priceline and eBay had $3.1 billion and $2.6 billion of share repurchase authorization remaining, respectively, according to Morgan Stanley. 

See also: Analyst: Fintech Is A Big Winner From Tax Reform, 5 Stocks To Play

Moving on to the U.S. federal statutory tax rate, which will be lowered from 35 percent to 21 percent, the firm estimates an average 6-percent reduction in the global effective tax rates for the companies in its coverage universe.

Tax Rate Reduction Could Eat Less Into GrubHub's Profit

GrubHub Inc GRUB, being the highest taxpayer, is the clearest winner, although all companies will benefit, Nowak said. 

Although the headline rate goes down, Morgan Stanley said some of the international structures that were previously untaxed will now fall into the tax net.

"Particularly significant in our coverage is the base erosion provision as well as the 'global intangible low-taxed income' or GILTI provision, which would raise an effective 12-percent tax on foreign-source intangible income," Nowak said. 

The lowest 2018 tax rate assumption among the companies in its coverage universe is for Facebook Inc FB, at 15 percent, and the highest is for GrubHub, at 41 percent.

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