RBC Capital Weights In On Alibaba, Amazon, Facebook And Netflix

By Kate George 

Ahead of fourth quarter earnings, Mark Mahaney of RBC Capital provided an update on large cap Internet stocks in his coverage universe. Four of his top picks include Alibaba Group Holding Ltd BABA,Amazon.com, Inc. AMZN, Facebook Inc FB, and Netflix, Inc. NFLX. Here, he highlights what investors should be aware of for each company ahead of earnings.

Alibaba Group Holding Ltd

Heading into earnings season, Mahaney's estimates are slightly higher than that of the Street. He forecasts December quarter revenue of 35.3B RMB, compared to the consensus of 32.8B RMB, and adjusted EPS of 6.09 RMB, compared to the consensus of 5.76 RMB. The analyst is bullish due to Alibaba's strong market position and the company's better than expected Singles Day sales.

In a survey of Chinese online consumers conducted by RBC, Mahaney discovered that "Chinese consumers exhibit robust spending behavior" and that "Alibaba holds a strong position in the Chinese Online Retail landscape." Furthermore, the Chinese e-commerce giant recorded $14.2 billion gross merchandise volume on Singles Day, China's massive shopping holiday, compared to $9.3 billion in the year prior.

Looking forward, Mahaney is focusing on desktop and mobile growth trends. Specifically, he expects the China Retail Desktop segment to decrease 29% year-over-year for the December quarter, primarily due to the shift to mobile. Consequently, he expects the Mobile segment to increase 95% year-over-year from the December quarter. Lastly, the analyst points to Taobao and Tmall, both Alibaba-owned sites, as the most commonly used online shopping sites in China. He expects GMV for the two sites to increase y/y by 17% and 32%, respectively.

Due to these positive trends, Mahaney maintains an Outperform rating on Alibaba with a $95 price target. According to TipRanks, 10 analysts are bullish on Alibaba while 2 remain neutral. The average 12-month price target between these 22 analysts is $95.74, marking a 37% potential upside from current levels.

Netflix, Inc.

The online video streaming site will post Q4 earnings on January 19. Mahaney estimates that Netflix will post revenue of $1.82 billion and GAAP EPS of $0.02. Both figures are relatively in line with consensus estimates.

Based on a recent survey, Mahaney notes that Netflix experienced its highest penetration level ever with record usage levels. According to the survey, 51% of respondents use Netflix to watch movies, compared to YouTube with 48% and Amazon with 25%. Furthermore, the service continued to grow in both France and Germany, demonstrating high rates of user satisfaction. The analyst also pointed out that Netflix launched in Spain, Portugal, Japan and Italy in the December quarter.

For the company's earnings report, Mahaney is focusing on several factors including subscription metrics and trends, and domestic streaming contribution margins. He also points to international profitability, noting, "We anticipate International contribution losses of $117MM, up from a $68MM loss in Q3 and driven by substantial market launch costs." Mahaney reiterates an Outperform rating on Netflix, explaining, "We still see a Global Media Platform with an excellent management team, approaching 75MM Subscribers, mounting profitability in its core/lead U.S. market… and increased evidence of pricing power."

According to TipRanks, 15 analysts are currently bullish on the streaming company, 2 are bearish, and 7 remain neutral. The average 12-month price target between these 24 analysts is $125.43, marking a 9% potential upside from current levels.

Amazon.com, Inc.

With this e-commerce giant slated to report fourth quarter earnings later this month, Mahaney's earnings estimates are relatively in-line with consensus. The analyst acknowledges that "Amazon has not posted topline results above guidance/Street in Q4 since 2009," but nonetheless expects $36 billion in revenue and GAAP EPS of $1.22.

For fourth quarter earnings, Mahaney will be looking at gross margin trends, overall operating margin trends, AWS metrics, and North America/international retail results. He expects Q4 gross margins of 32.5%, a y/y increase of 300bps, explaining, "Consistent and material Y/Y GM expansion over the past 2+ years has been one of the most important fundamental factors for the stock's performance, in our view. This trend likely needs to continue for shares to move higher, and we believe it will." Mahaney warns that Amazon's heavy investments in international markets will weigh on profitability, but is counting on AWS to continue to increase revenue by 50% annually. Overall, for Q4 Mahaney expects to see AWS revenue increase 55% y/y; a 26% y/y increase in North American retail revenue; and a 23% y/y increase in international retail revenue.

Mahaney reiterates his Outperform rating on Amazon with a $775 price target. According to TipRanks, 25 analysts are bullish on the company while 5 remain neutral. The average 12-month price target between the 30 analysts is $754.52, marking a 22% potential upside from current levels.

Facebook Inc

In preparation for Facebook's earnings call on January 27, Mahaney is expecting the social media giant to post revenue of $5.44 billion and non-GAAP EPS of $0.69, both in line with consensus. He reiterates an Outperform rating on Facebook with a $130 price target.

Mahaney is focusing on "moderately positive" traffic trends, improved user experience platform updates, user growth, and advertising revenue. The analyst believes Facebook's monthly average users will increase 13% y/y, noting, "Facebook has continued to grow users at a reasonably robust pace off a very large base." He also estimates a 52% y/y increase in advertising revenue. Overall, Mahaney believes the company has "plenty of strong, secular platform growth ahead." He continues, "In part because FB mgmt is correctly prioritizing the user experience while developing better solutions for advertisers. And in part because FB is effectively investing against several material near/medium/long-term."

According to TipRanks, 33 analysts are currently bullish on Facebook while one remains neutral. The average 12-month price target between these 34 analysts is $125.33, marking a 28% potential upside from current levels.