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Internet/e-Commerce 1Q Internet Sector Preview
Earnings Preview
1Q Preview; Expectations building on a strong 2H
Our early sector preview highlights our estimates vs. Street, early 1Q data points, and some opportunities for 1Q results for 30 stocks in our coverage group (more detailed company previews to follow). For large-caps, Street 2017 EPS estimates are down 8% YTD while the average stock price is up 9% YTD; suggesting macro and 2H optimism is driving stocks, which could continue throughout earnings season. 1Q was not without potential pressures, including ramping competition in several sectors and delayed tax refunds. A key theme for the group, in our view, is advertising & listing ranking revenue initiatives at eCommerce sites (AMZN, EBAY, EXPE), and we are constructive on all three stocks. Per our Internet sentiment ranking screen (page 7), FB, WIX, TREE have best sentiment while TWTR and TRIP have weakest.
A few early checks positive, mixed eCommerce data
Our early ad checks suggest robust overall demand, aided by somewhat easy comps vs 1Q’16, with Instagram momentum a standout. eCommerce is more mixed, with some concerns on consumer spending due to delayed tax refunds, but optimism that spending will rebound in March/April. In travel, there are modest concerns on pressure on US inbound travel, a bigger negative for Expedia than Priceline. FX spot rates for both the Euro and the Pound have depreciated 1% vs. the USS since end of Jan.
Many key upcoming events for stocks in 2Q
Top events in 2Q include Facebook’s F8 developer conference on April 18-19, Google’s Marketing Next keynote on 5/23, an AWS event in San Francisco on April 18-19, expected closing Verizon’s acquisition of Yahoo, Netflix’s release of several key franchise including House of Cards, Orange is the New Black, Sense&, Glow, and Unbreakable Kimmy Schmidt, consumer wide release of Pandora Premium, Expedia’s new HomeAway disclosures and, possibly, Amazon’s new revenue disclosures.
We expect meet/beat EPS for several companies
We are above the Street on 2017 EPS for 16 of the 25 stocks discussed within and, of those, we are most confident in Facebook & Priceline for 1Q upside potential. We expect Facebook to benefit from robust traffic, Instagram momentum, and greater adoption of audience targeting tools. We also think Priceline can beat 1Q given strong booking trends into the quarter and a modest recovery in European travel. We are below the Street on 2017 EPS for AMZN, TRIP, and YHOO. Expedia is a top eComm/travel idea for 2Q/3Q on potential for
accelerating room nights, HomeAway optimism, and less uncertainty on near-term estimates.
GOOG, AMZN & ZG interesting 1Q sentiment stocks
For large cap’s, we believe GOOGL has had high recent interest given controversy around Youtube ad placements. We are not sure if Google will provide clarity on the issue on their call, but we do expect advertisers to return by 3Q and any overhang to be resolved. For Amazon, the company had new revenue disclosures in its 10-K filing, and there is growing optimism on advertising being a positive bottom-line driver. In SMID Internet, Zillow has more controversy going into 1Q as investors are once more concerned about potential regulation by the CFPB limiting the ability of agents and mortgage brokers to co-market on the platform. We remain positive on the stock due to its dominant position in online real estate and our belief that the high RO! of the ad unit (our survey suggested >6x return) will ensure that agents buy Zillow placements regardless of mortgage broker incentives. Additionally, we see earnings upside potential.
BofA Merrill Lynch does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Refer to important disclosures on page 62 to 64. Analyst Certification on page 59. Price Objective Basis/Risk on page 53. 11729935
Timestamp: 06 April 2017 04:12AM EDT
Bankof America Merrill Lynch
Equity | 06 April 2017
Americas Internet/e-Commerce
Justin Post
Research Analyst MLPF&S
+1 415 676 3547 justin.post@baml.com
Nat Schindler
Research Analyst
MLPF&S
+1 415 676 3574 nathaniel.schindler@baml.com
Ryan Goodman, CFA Research Analyst
MLPF&S
+1 415 676 3560 ryan.c.goodman@baml.com
Jason Mitchell
Research Analyst
MLPF&S
+1 415 676 3534 jason.s.mitchell@baml.com
Akshay Bhatia
Research Analyst MLPF&S
+1 415 676 3548 akshay.bhatia@baml.com
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