Internet Stocks Picked to Take Off in 2020 – Barron’s

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Not all technology stocks beat the market last year. Indeed, internet stocks lagged behind the major indexes. But underperformance can also present attractive buying opportunities.

To take a look, we asked two veteran internet analystsMark Mahaney of RBC Capital Markets and Colin Sebastian of Bairdfor their top picks for 2020.

Mahaney believes that the internet stocks relative underperformance sets up the sector for strong multiyear returns. The First Trust Dow Jones Internet Index fund (ticker: FDN), which tracks the performance of the Dow Jones Internet Composite index, rose 19% last year, versus the S&P 500 indexs total return of 32% and the Nasdaq Composites 37% gain.

The sectors valuation is reasonable, he says. The median forward enterprise-value-to-Ebitda ratio for large-cap internet names remains around 12, near where it was at the end of 2018.

One of Mahaneys top picks is Google-parent Alphabet (GOOGL). He cites the companys leadership in using artificial intelligence to improve its search and ad platforms. Whoever has the most data wins, he says. Because of [Googles] machine learning, the ads are becoming more relevant.

The analyst has a $1,500 price target for the stock and an Outperform rating. He estimates that Alphabet will spend $51 billion in research and development and capital expenditure for fiscal 2019. This high level of investment spending is a positive sign that the company is bullish on its long-term growth trends, he says.

Sebastian is also positive on Alphabet, with an Outperform rating. He predicts that both its cloud-computing businesses and YouTube will finally become large enough to move the needle for the internet giant this year. The companys recently increased pace of stock buybacks will probably boost the share price, he says.

Amazon.com (AMZN) is his top large-cap idea. Sebastian expects that the e-commerce behemoths profitability will improve during the second half of the year, and he sees big growth opportunities in businesses like cloud-computing, shipping logistics, and advertising.

Outside of the major internet companies, the two analysts have some other interesting ideas. Mahaney thinks that Uber Technologies (UBER) is currently the most dislocated stock, and one that could provide the most upside at current prices. He says that investor sentiment on Uber has become too negative, with the stock down 30% from its initial-public-offering price.

Ride-hailing is actually a very good business, he says, noting how the Uber Rides segments revenue grew roughly 20% in its most recent reported quarter. Mahaney thinks that Ubers profit margin could rise at a much faster rate than investors expect. The companys current predicament reminds him of where Facebook (FB) was a year ago when its growth rate slowed and it was wrestling with data-privacy troubles. Facebook shares rebounded and ultimately rose 57% in 2019.

Theres a lot of dislocation and fear in the stock, Mahaney says. If [Uber management] can continue to reduce losses and maintain healthy revenue growth rates, I think the Uber shares can materially go up higher.

Sebastian likes mobile-videogame publisher Zynga (ZNGA), pointing to its compelling game pipeline and current game franchises.

In October, the company reported better-than-expected September-quarter earnings results, achieving its best quarterly revenue number in its history. At the time, CEO Frank Gibeau told Barrons that he did not see any large negative impact from the recently released Apple Arcade gaming service.

Zynga has done a good job creating a portfolio of [internet enabled] live services, Sebastian says. It means that, with scale, it will lead to more profitability and more visibility.

Longer term, the analyst is also excited about further advances in artificial intelligence and computing that could spur new waves of growth for technology companies in the new decade.

Real machine learning is possible in the years ahead, where computers thoughtfully and intelligently solve problems, he says. Within the grasp of the next 10 years, Id say quantum computing is very exciting because it will massively increase computational capability.

Sebastian thinks that over time quantum computing may be able to achieve breakthroughs in medical research and other data-intensive applications. Quantum is a new paradigm of computer processing where bits of information can hold multiple values, versus the 0 and 1 binary values of traditional computing.

Despite their optimism, both Mahaney and Sebastian acknowledged that regulatory scrutiny of Big Tech is a risk this year. Government agencies have been investigating the major internet companies competition practices.

But regulators bark will probably be bigger than their bite, Sebastian says, and the likely bigger risk is management distraction, versus actual regulatory action or legislation.

He says the new decade will bring a new Roaring 20s for technology, similar to the 1920s for the U.S. economy. Investors should bet on companies that can benefit from innovations.

Write to Tae Kim at tae.kim@barrons.com

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Internet Stocks Picked to Take Off in 2020 - Barron's