Amazon A Better Bet This Year Than Facebook Or Google, Bernstein Predicts

• Shares of Facebook Inc FB, Alphabet Inc GOOG and Amazon.com, Inc. AMZN have been under pressure over the past one month.
• Bernstein’s Carlos Kirjner maintained Outperform ratings for Alphabet and Amazon and a Market Perform rating for Facebook.
• Kirjer believes that all three companies are poised to benefit from return to scale and network effects.

Shares of Facebook, Amazon and Google outperformed the S&P 500 Index in 2015 by 32 percent, 121 percent and 46 percent, respectively. These have, however, been declining so far in 2016.

Analyst Carlos Kirjner said that all three companies are poised to benefit from returns to scale and network effects. He added that a significant portion of the operating expenses of all three is discretionary R&D.

“In our view, the Street in general neither gives them appropriate credit for the revenue and profit upside potential associated with discretionary R&D, nor does it recognize that if this potential is not realized, the R&D expense may in fact moderate,” the Bernstein report noted.

Kirjner expects these companies to perform well in 2016 and outperform expectations. He added, however, that the level of conviction for each company’s ability to outperform varies, with thee conviction for Amazon being the highest.

Amazon

The price target for Amazon is at $800. The company could beat 4Q expectations, with revenues of $35.56 billion, gross profits of $12.35 billion and non-GAAP EPS of $3.46.

Kirjner believes that the market could be underestimating the profitability of the company’s core retail business as well as the growth and margin potential for AWS. Amazon is also expected to continue performing well and beat market expectations in 2016 and 2017.

Google

The price target for Alphabet is maintained at $950. The company is expected to report 4Q revenues of $20.77 billion, EBITDA of $8.41 billion and adjusted EPS of $8.47.

The Street seems to be underestimating the resilience and growth potential of Google’s main business, search advertising and upside from its existing business like YouTube, the analyst said. He added that Google’s computing and communications infrastructure, datasets and computer science capabilities offer the company several long-term advantages.

Facebook

The price target for Facebook is maintained at $134. The company is expected to post 4Q revenues of $5.40 billion, EBITDA of $3.47 billion and adjusted EPS of $0.68.

Kirjner has the least conviction on Facebook’s ability to beat consensus expectations, given that some of the recent revenue growth was driven by a significant increase in its ad load. The potential increase in revenues from Instagram and the monetization benefits from WhatsApp also do not give much confidence at present, Kirjner commented.