A Mid-Year Review Of Baird's Favorite Internet Stocks

The technology-weighted NASDAQ Composite hit an all-time closing high on June 8, and subsequently, the tech space has seen some degree of pullback, giving rise to chatter about a meltdown in the tech space.

It is against this backdrop that Baird presented a mid-year review of its favorite internet stocks.

E-Commerce: The Star Performer

Baird in a note said e-commerce has led the pack after a strong first-half of 2017, with gains of over 50 percent. The reason for the outperformance, according to the firm, is the ongoing secular shift from physical to online retail, which has benefited online retailers and market places.

Analyst Colin Sebastian said the space is resonating as an investment theme among a large group of investors.

Notwithstanding the less impressive showing by online advertising, the analyst noted that large-scale platforms such as Facebook Inc FB continued to outperform smaller scale companies such as Yelp Inc YELP.

Healthy Platforms: Long-Term Top Picks

On a long-term basis, Baird remains positive on internet sector stocks that show a combination of share gains within secular-growth markets, strong free cash flow attributes and healthy platform characteristics. Accordingly, the firm recommends build or add to positions in the following stocks, named as longer-term top picks:

• Amazon.com, Inc. AMZN.
• Alibaba Group Holding Ltd BABA.
• Facebook.
• Alphabet Inc GOOGL GOOG.
• Paypal Holdings Inc PYPL.
• Shopify Inc (US) SHOP.

Company-Specific Catalysts

Baird also dwelled on some company-specific events in the second half of 2017, which could lead to upside in estimates and share prices:

• EBay Inc EBAY's structured data and refreshed ad campaigns.
• PayPal's customer choice expansion/asset light initiatives.
• Twitter Inc TWTR's user growth acceleration.
• Activision Blizzard, Inc. ATVI's September/November releases of "Destiny 2" and "Call of Duty: WWII + eSports" launch.

Baird feels all these may lead to short-term increased in volatility or share price appreciation.

Alpha Opportunities

Baird also pointed to some alpha opportunities in its sectors in the year-to-date period. Alpha opportunities refer to sectors that underperformed the benchmarks and the market, with potentially improving growth trends over the balance of the year:

• ChannelAdvisor Corp ECOM.
• Liquidity Services, Inc. LQDT.

The alpha opportunities outside of its coverage universe included:

• Baidu Inc (ADR) BIDU.
• Groupon Inc GRPN.
• Pandora Media Inc P.
• Tripadvisor Inc TRIP.

Summarizing, Baird noted that its Outperform-rated continue to shine, outpacing the market, and Neutral-rated stocks rebounded in the second quarter after a stagnant first quarter. Top-performing names, according to the firm, are Shopify, which is up 100 percent, Carvana Co CVNA, which has rebounded post-IPO, and Wayfair Inc W, which has gained 115 percent year to date.

Ratings

• Amazon: Outperform.
• Activision: Outperform.
• Alibaba: Outperform.
• Alphabet: Outperform.
• Carvana: Outperform.
• EBay: Outperform.
• ChannelAdvisor: Neutral.
• Facebook: Outperform.
• Liquidity Services: Neutral.
• PayPal: Outperform.
• Shopify: Outperform.
• Twitter: Neutral.
• Wayfair: Neutral.
• Yelp: Neutral.

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