Last year was a decent year for Nomura’s digital portfolio, one marked by margin expansion and strong top- and bottom-line estimates. However, Nomura expects more turbulence throughout 2020.
Analysts Mark Kelley and Andrew Marok lean conservatively on the sector as the Street has, on average, recently reduced rather than raised estimates.
In the internet group, Nomura expects an extension of 2019’s regulatory, privacy and antitrust concerns. While the analysts see the Department of Justice and Federal Trade Commission making some early rulings on these issues, they anticipate no near-term resolution. Most of the sector risk will rise internally.
“Slowing end-market growth will be more of a focus this year (digital advertising likely to grow in the low teens through 2022 vs. 20%+ a couple of years ago), and more attention will be placed on the shift from linear TV advertising towards CTV as well as shoppable ads,” Kelley and Marok wrote.
The poor IPO performances of 2019 could compound growth and regulatory concerns and ultimately depress valuation and margin estimates.
Pinterest Inc PINS, Etsy Inc ETSY and Chewy Inc CHWY remain the best risk-to-reward opportunities in Nomura’s portfolio, but the analysts recommend buying Alphabet Inc GOOGL for its stability, ongoing diversification and “attractive valuation.”
Kelley and Marok anticipate a shakeup of the Interactive Entertainment group as Sony Corp SNE and Microsoft Corporation MSFT launch new consoles this year.
“We see a relatively muted effect on publishers (especially the largest players), as the technological jump from the current generation to the upcoming one is not as stark as previous transitions, though increased competition for gamers' spend from big-name launch titles and the consoles themselves might come into play,” they wrote.
“We also anticipate discussion around the emergence and scaling of cloud-based platforms (especially from non-gaming-native companies) and the evolution of app store take rates, but we see these issues as longer term in nature.”
Nomura likes Electronic Arts Inc. EA, but Activision Blizzard, Inc. ATVI remains its top choice for its key-franchise execution, strong pipeline and untapped mobile opportunities.
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