Six Internet Stocks Morgan Stanley Is Watching Amid Earnings Season

In a report published Tuesday, Morgan Stanley analysts led by Benjamin Swinburne previewed several Internet stocks ahead of their quarterly prints. "Internet stocks face foreign exchange headwinds and trade at generally lofty valuations – particularly when incorporating non-cash comp," Swinburne wrote. "With foreign exchange yet again trimming estimates, we look for stocks with expectations that we believe can be exceeded, secular tailwinds that are real and sustainable, and importantly where incremental margins can or are improving."

Top Picks: LinkedIn, Yelp

Swinburne singled out LinkedIn Corp LNKD and Yelp Inc YELP as his two top picks. Yelp: Mobile Growth Yelp is expected to demonstrate strong mobile app user growth and accelerating total mobile user growth. The analyst noted that an improving sales force efficiency will drive better than expected local ad growth. LinkedIn: History Of Conservative Guidance In Play LinkedIn has a history of guiding conservatively, and the company's upcoming print is no different. Swinburne noted that ComScore Desktop page views and total monthly active users showed an upward growth trajectory and continues to show momentum. The analyst singled out Talent Solutions and is expecting a 35 percent year over year growth in enterprise customers as the company benefited from an increased sales force and easy year over year comps.

Overweight: Facebook, Netflix

Both Facebook Inc FB and Netflix, Inc. NFLX face foreign exchange headwinds, but Facebook's "still-low" pricing, 50 percent organic ad growth and strong mobile monetization is enough reasons for investors to be bullish. On the other hand, Netflix's original programming should drive year over year growth in domestic streaming gross adds. Moreover, the company's already proven success in the U.S. and initial international markets provides a "roadmap" to success in new markets.

'Special Situation': Yahoo

Swinburne isn't expecting much from Yahoo! Inc. YHOO's core business with continued revenue declines in Display (minus one percent) and "modest" growth in Search (six percent) with declines in Others (minus 18 percent percent). Despite the weak outlook at Yahoo's core, the company's stake in Alibaba Group Holding Ltd BABA is undervalued within Yahoo and the company's Asian assets (Alibaba and Yahoo Japan) account for 85 percent of the company's overall value. The analyst noted that this fact provides downside support against further deterioration in Yahoo's core business.

Equal-Weight: Google

Google Inc GOOG GOOGL, like Facebook, faces foreign exchange headwinds, but Google faces a faster than expected erosion in desktop usage, and mobile (for the time being) is still a headwind to ad dollar growth. Swinburne did note that shares of Google are not expensive and owning the name is a long-term play. However, heading in to the quarter, the consensus estimates appear high and investments in product diversification is proving to be expensive.