Alphabet (GOOGL) and Facebook (FB) Downgraded to 'Neutral' at Citi as Decelerating Growth Is Not Bullish for Multiples
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Citi analyst Jason Bazinet moved to downgrade Alphabet (NASDAQ: GOOGL) and Facebook (NASDAQ: FB) to “Neutral” from “Buy” as he expects to see a more challenging environment for companies dependent on the internet ad growth.
“We like Roku because we believe the connected TV market is still nascent. And, Amazon remains our favorite Internet stock because we see ample growth in B2B services beyond ads (e.g. AWS, FBA, Commissions and Logistics),” the analyst wrote in a note sent to clients.
On the other side, growth is likely to decelerate after 2Q21 on tougher comps, which historically isn’t bullish for multiples, says Bazinet.
“During last 15 years, Internet ads enjoyed three periods of accelerating growth: ’10 to ’12, ’15 to ’18 and today. But, they also exhibited three periods of decelerating growth: ‘08 to ‘10, ‘13 to ‘15 and ‘18 to ‘20. Even if the bullish sell side forecasts are right, next wave of deceleration – the 6th turning - begins in 3Q21 (when yoy comps are tough) or 2Q22 (when two year stacked growth rates peak). Recent shifts – from accelerating to decelerating growth – has typically not been bullish for multiples,” the analyst adds.
As for the past two quarters, the internet ad strength was very strong, he notes.
“From 1Q16 to 1Q21, Internet ad revenue was highly correlated (R2 of 0.97) to: US personal consumption (PCE), eCommerce spend and global retailer web traffic. In short, most of the recent strength makes sense to us.”
“The sell side has taken 4Q20 and 1Q21 strength and extrapolated it over the next five years. Indeed, the sell side expects ~$75B of annual growth per year through 2025 versus ~$40B of annual growth in 2018 to 2020,” the analyst adds.
He adds that some investors believe the ad intensity - ad spends per dollar of economic activity - is rising, a these with which Bazinet doesn’t agree.
“We see little evidence of this. For the last six years, US ad spend (across all mediums) has represented (a flattish) 1.6% of Personal Consumption Expenditures (PCE). As such, we see little evidence of ‘below the line’ ad spend moving up to advertising.
Price targets for FB and GOOGL remain unchanged at $320.00 per share and $2,415.00 per share, respectively. Elsewhere in the internet section, Pinterest (NYSE: PINS) saw its price target slashed to $65.00 per share from $85.00.
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