UBS On Internet Stocks: Chewy, Fiverr, Peleton Downgraded To Sell, Take-Two Interactive To Neutral

UBS analysts took a deep-dive into internet-themed stocks and updated their thesis on individual stocks where the sell-side firm's risk-reward calculation has shifted to neutral or negative.

The UBS internet Analyst: Eric Sheridan downgraded the following names:

Chewy Inc CHWY from Neutral to Sell, unchanged $75 price target.

Fiverr International Ltd FVRR from Neutral to Sell, price target lifted from $148 to $190.

Peloton Interactive Inc PTON from Neutral to Sell, price target lifted from $115 to $124.

Take-Two Interactive Software, Inc TTWO from Buy to Neutral, unchanged $200 price target.

The Chewy Thesis: The U.S. online pet food and health market is estimated to grow at 5% year-over-year, but Chewy can outperform the market's growth with a 15% revenue compounded annual growth rate through 2025, Sheridan said in the downgrade note.

Chewy should become free cash flow positive in 2021, along with turning EBITDA profitable and growing margins, the analyst said.

Yet the stock's 68% gain in the last three months alone implies the risk-reward profile is no longer, favorable despite ample opportunity to grow in the online pet category, he said. 

The company also faces a potential headwind in 2021, as it will be up against difficult comparisons, Sheridan said.

Throughout 2020, Chewy benefited from a pull-forward of demand amid the COVID-19 pandemic, the analyst said. 

The Fiverr Thesis: The freelance industry is still in its very early stages of growth, and Fiverr is well-positioned to take advantage of ongoing shifts in how companies hire and people work, Sheridan said in the downgrade note.

The company should be able to sustain 30% revenue growth over the next five years and reach at least 25% adjusted EBITDA margins, the analyst said.

But at current levels, Fiverr's stock is pricing in $1.3 billion in revenue in 2025 versus UBS' estimates of $750 million, he said.

Fiverr would need to grow revenue 50% to 60% in 2021 and 2022 to justify the valuation, Sheridan said. 

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The Peloton Thesis: Peloton is well-positioned to steal market share from traditional fitness companies given its unique and unified approach, Sheridan said in the downgrade note.

The company should be able to grow adjusted EBITDA margins from around 7.7% this year to 9.7% by 2024, the analyst said. 

Peloton should also show large revenue growth from an international expansion, new products and software and a greater focus on digital offerings as a driver of growth, he said. 

But Peloton's stock is up around 160% in the last six months and already prices in future "robust" sales growth, subscriber growth and a market leadership position, according to UBS. 

The Take-Two Thesis: The video game industry is well-positioned to grow over the years from improving cloud technology, free-to-play features and the growth of esports, among other catalysts, Sheridan said in the downgrade note.

As an industry leader, Take-Two will be able to deliver outsized performance versus its peers, the analyst said. 

Yet the stock gained 37% over the last six months, and this already bakes in high expectations, he said: 1) high-single-digit revenue growth over the next five years, 2) 61% adjusted gross margins, 3) 33% adjusted EBITDA margins in 2025 and 4) long-term adjusted EBITDA margins of 30% or more.

Price Action: Here's how the four stocks were trading Tuesday afternoon:

• Chewy down 0.49% at $107.59. 
• Fiverr down 9.91% at $240.58. 
• Peloton down 4.91% at $150.06. 
• Take-Two up 1.57% at $199.37.

Photo courtesy of Peloton.