Technology Research Industry Update December 7, 2017 - GBH Insights
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Technology Research
Industry Update
December 7, 2017
Thoughts on FANG Stocks Heading into 2018; Healthy Secular
Trends Front and Center
Daniel Ives, Head of Technology Research | 917.210.3220 | daniel.ives@gbhinsights.com
While FANG stocks have been standout performers in 2017 we have seen a
rotation out of these core names over the last week with some tech investors
locking in gains for the year, as well as lingering worries around growth/competition
causing some concern on the Street as we head into 2018. Overall, we continue
to be very bullish on secular tech themes heading into 2018 around
streaming/content, e-commerce growth, online ad growth, and the
transformational cloud shift among enterprises. While the regulatory environment,
corporate tax changes, and the macro backdrop create both opportunities and
challenges for these FANG names as well as the rest of the tech sector, we believe
the underlying fundamentals, spending environment, and consumer/enterprise
landscape looks very healthy heading into 2018 with some potential speed bumps
ahead to keep an eye out for. Below we discuss our thoughts on each of these
FANG names going into year-end/2018 and lay out the growth catalysts and
biggest potential risks for each of these tech stalwarts as we look into our crystal
ball. While we are maintaining our Highly Attractive ratings and positive views on
FANG stocks into 2018, we are raising our price targets on Amazon from $1,270
to $1,375 and Alphabet from $1,100 to $1,190 to reflect our increased confidence
on these underlying fundamental stories over the coming year.
Facebook (Highly Attractive, $210 Price Target)
• Healthy MAU growth front and center. While there continues to be
evolution around Facebook’s ad growth model and monetization strategy, it
appears the company is executing extremely well in the field (e.g.
engagement, MAU growth, ad growth) and all key metrics look healthy
heading into 4Q and 2018 based on our recent checks and GBH survey
work. We maintain our Highly Attractive rating and $210 price target.
• 2 billion users and counting. We estimate Facebook is on a trajectory to
have another solid quarter in 4Q on the MAU front and has strongTechnology Research
Industry Update
December 7, 2017
momentum heading into 2018 on this all-important growth driver for the
business. With MAUs currently north of 2 billion total users, Facebook will
continue to grow its massive global installed base in our opinion while
importantly monetizing users especially on the Instagram side of the house,
which remains the “core 1-2 punch” that underlies our bullish thesis on the
name.
• Instagram growth and monetization are the keys going forward. We
note that Instagram already announced 800 million MAUs in September (vs.
700 million in April) as this platform remains a “golden jewel” in Facebook’s
platform in our opinion with healthy monetization and ad growth set to play
out in 2018 based on our forecasts. With this platform on pace to be over
1 billion MAUs by 1H2018 based on our estimates, we view this an
underappreciated asset by the Street that could be a major growth catalyst
for Facebook over the next 12 to 18 months on the advertising front.
• Investing for future growth. Facebook must invest in newer growth
initiatives in our opinion to further expand its drivers around ad growth rates,
AR, mobile platform expansion, video, consumer engagement, and
Instagram/Messenger monetization into 2018 and beyond. This is an
integral part of Facebook’s strategy that we expect to play out over the
coming years despite worries on the Street around a stepped up investment
profile for the coming year.
• Biggest risk/concern heading into 2018: Facebook recently gave a FY18
outlook that is anticipated to be an “investment year” with forecasted total
expense growth of 45%-60%. While the term “investment year” are never
two words investors want to hear, we do believe this is a prudent strategy
despite causing some agita for bulls on the name. The company is citing
this significant increase in spending primarily to the hiring of more
employees to work on security/safety along with payments Facebook is
making for shows in its recently unveiled Watch tab as video remains a
major “wild card” product initiative in our opinion. To this point, this higher
investment profile could be a lingering cloud over Facebook’s shares in the
Daniel H. Ives
917.210.3220
daniel.ives@gbhinsights.com
Copyright © 2017 GBH Insights
Page 2Technology Research
Industry Update
December 7, 2017
near term until investors can get further comfort that these investments are
fueling the next phase of the company’s growth story for 2018 and beyond
with margin improvement hopefully set to kick in for 2019.
Amazon (AMZN-Highly Attractive, $1,350 Price Target)
• Iron grip on e-commerce spending. Amazon was the clear star of Cyber
Monday as we forecast the company is on pace to capture between 45-50%
of all holiday online sales this year (vs 38% in 2016). While Walmart has
done a commendable job beefing up its e-commerce strategy through
organic (partner push, inventory expansion, offline driving online sales) and
acquisitive means (Jet.com), Amazon continues to have an “iron grip” on
the e-commerce market heading into 2018 despite a clear bullseye on its
back from retailers around the world including Bentonville. To reflect our
increased confidence in Amazon’s underlying core growth drivers into 2018,
we are raising our price target from $1,270 to $1,350 while maintaining our
Highly Attractive rating.
• Prime membership growth is Amazon’s key asset. Bezos has built a
Prime membership of over 85 million strong which is poised to increase
spending another 20%+ this year and likely beat 4Q estimates handily and
is on a stronger than expected organic growth pace for 2018 in our opinion.
Prime growth remains the key jewel for Amazon going forward as cross-
selling around Whole Foods customers and putting up more walls/barriers
around its growing Prime customer base is a major ingredient in Amazon’s
ability to fend off competition. International growth on Prime will also be
another catalyst that we expect to play out in 2018 and should help further
drive better than expected e-commerce retail growth in the year ahead.
• Driving the Amazon flywheel effect. While near-term there is a major
focus on significant investments around fulfillment, Prime, Echo/Alexa,
AWS, and integrating the Whole Foods acquisition into the fold which could
Daniel H. Ives
917.210.3220
daniel.ives@gbhinsights.com
Copyright © 2017 GBH Insights
Page 3Technology Research
Industry Update
December 7, 2017
depress margins over the next few quarters, we believe this is “near term
pain for long-term gain” as Amazon has a unique window of opportunity to
double down on its consumer and enterprise initiatives heading into 2018
and drive significant growth/cash flow for the coming years as Bezos & Co.
further diversifies the Amazon franchise globally.
• Whole Foods synergies=tailwinds into 2018. Strong customer overlap
is a major synergy behind the Whole Foods acquisition and provides
another avenue of growth into this key customer demographic to increase
Prime membership and cross-sell over the next year in our opinion. We are
encouraged by the early go-to-market techniques and cross-selling that
Amazon has been deploying in Whole Foods stores, as with Prime
members spending roughly 2x more than non-members increasing this
customer base represents the holy grail. With Amazon’s underlying goal to
increase the average customer purchase/basket size, we believe further
integration between Whole Foods inventory (recent price cuts in-line with
Amazon’s playbook) and the Amazon e-commerce machine is a great 1-2
punch that should drive increased sales/ramp in Prime members for 2018
and is still underappreciated by the Street in our opinion. We also believe
potentially aggressively betting on other consumer areas such as
healthcare with the pharmacy segment front and center, despite recent
noise, is a smart strategic move as Amazon looks to further spread its
tentacles across the consumer landscape globally in 2018 and beyond.
• AWS remains a pillar of strength. Our AWS checks this quarter are
strong yet again as we are seeing major tailwinds on the company’s all-
important cloud business as more enterprises shift to the AWS value
proposition heading into 2018. We are modeling AWS growth of 40%+ year
over year and believe Amazon has strong momentum as the combination
of a secular cloud shift, entrenched leadership position, and recent price
cuts are catalyzing customer adds and balanced strength geographically
speaking, a dynamic we expect to accelerate into 2018. While this “two
horse cloud race” between AWS and Microsoft should disproportionably
Daniel H. Ives
917.210.3220
daniel.ives@gbhinsights.com
Copyright © 2017 GBH Insights
Page 4Technology Research
Industry Update
December 7, 2017
benefit both companies in the field, continuing to stay one ahead of the
competition with tech stalwarts such as Dell/EMC, Cisco, Google, Oracle
among others going after the same piece of the pie remains a competitive
dynamic we will be closely watching over the coming year.
• Biggest risk/concern heading into 2018: We believe the biggest risk and
investor concern for Amazon and Bezos is emerging competition from every
direction of the consumer and enterprise landscape with bears pointing to
2018 as finally the year that competitive pressures puts a dent in the
Amazon armor. To this point, while on the retail e-commerce front
behemoths like Walmart have significantly stepped up their game, we do
not believe this should significantly alter the Amazon growth story for 2018
as well as on the AWS front (Microsoft, other cloud players lurking).
However, we do believe the aggressive diversification strategy for Amazon
is smart, but does come with inherent risks as going after grocery (Whole
Foods) and now likely healthcare/pharmacy in 2018 could cause some
speed bumps around margins and near-term execution risks which are
something for investors to keep their eye with competition lurking from all
directions going after the Amazon consumer and enterprise spending pie.
Netflix (NFLX-Highly Attractive, $235 Price Target)
• Netflix well positioned for 2018 and beyond. As we head into year-
end/2018 we believe Netflix has a number of growth levers which should
fuel the company’s next phase of strategic penetration among both US and
especially international consumers. While the landscape for original
content has become increasingly competitive with new entrants entering the
market by the day (e.g. Disney, Comcast, etc.), we believe Netflix remains
in a unique position of strength to grow its content and distribution tentacles
over the next 12 to 18 months and thus further build out its massive content
Daniel H. Ives
917.210.3220
daniel.ives@gbhinsights.com
Copyright © 2017 GBH Insights
Page 5Technology Research
Industry Update
December 7, 2017
and streaming footprint. We maintain our Highly Attractive rating and $235
price target.
• Netflix’s competitive moat. We have confidence in the “Netflix content
machine” and its ability to expand original content creation (new releases
this quarter-Crown 2, Stranger Things 2) with minimal long-term negative
franchise impacts due to Disney canceling its license deal recently despite
noise in the market. Our bullish thesis on Netflix is based on our belief that
the company’s competitive moat, franchise appeal, ability to increase
international streaming customers through 2020, and original content build
out will translate into robust profitability and growth as the next phase of this
story plays out over the coming year.
• Content is king for Netflix in 2018 and beyond. The underlying growth
and franchise model at Netflix all revolves around original content build out
fueling consumer engagement and subscriber growth. With the appetite for
content among media companies reaching a feverish pitch, Netflix will be
spending between $7 billion and $8 billion on content in 2018, up roughly
$1 billion from its spending trajectory for 2017. On its 3Q earnings call,
management said it expects roughly 25% of its content spending to be
allocated towards original content in 2017 with a long-term target of 50% by
2020. With more consumer dollars shifting away from traditional cable with
cord cutting and towards streaming delivery, we believe Netflix has a long
runway of growth and opportunity ahead of itself and clear first mover
advantage despite intense competition from larger media players, pure play
competitors, and new potential entrants.
• International sub ramp up front and center. Netflix has talked about its
US domestic penetration potential in the 60M to 90M range with our
estimate that by 2019 they break the 60M mark (forecasting 54 million subs
Daniel H. Ives
917.210.3220
daniel.ives@gbhinsights.com
Copyright © 2017 GBH Insights
Page 6Technology Research
Industry Update
December 7, 2017
exiting 2017) and mid to high single digit domestic growth sustainable from
2019-2021. The holy grail of incremental growth (and profitability) going
forward will be from international customers as we believe Netflix has a TAM
of over 700M subs by 2020. With the company spending major resources
over the last two years building out a global distribution arm and customer
base in over 100 countries, we believe the fruits of this labor will start to be
fully realized in 2018 and beyond. With the US market starting to see a
normalized growth rate after a period of hyper-growth, we believe Netflix
has potential to get between 90M to 100M international subs by 2020 (vs.
~60M today), thus rounding out the long term growth and margin story for
the coming years. With the international segment turning the corner on
profitability in 2017, we believe this incremental growth will flow to the
bottom-line and translate into significant cash flow and EPS growth, a
dynamic that we believe is still underappreciated by the Street today. To
this point, as international growth ramps along with profitability, we believe
the Netflix growth story will transition from purely domestic driven into a
global streaming play, original content behemoth, and rising ARPU
franchise translating into a higher multiple and significant long term earnings
power and speaking to our bull case scenario for shares of Netflix heading
into 2018.
• Biggest risk/concern heading into 2018: Price elasticity remains a hot
button issue for the Street as with Netflix’s recent domestic price increase,
coupled by rising competition from the likes of Hulu and Amazon among
others (e.g. Apple, HBO GO), there are lingering questions heading into
2018 around customer retention/growth with lower price options and high
quality original content elsewhere in the market. While this remains a
lingering concern for 2018 as the battle for streaming content will put more
pressure on the Netflix machine (e.g. Disney/Fox deal looming), we are not
Daniel H. Ives
917.210.3220
daniel.ives@gbhinsights.com
Copyright © 2017 GBH Insights
Page 7Technology Research
Industry Update
December 7, 2017
overly concerned that this dynamic will alter the company’s growth trajectory
in the near-term given the Netflix competitive moat and original content
spending trajectory. That said, any speed bumps on the international sub
ramp and/or US price increase impact will negatively impact the
stock/multiple as the Street is hyper sensitive to any hiccups on these
initiatives.
Google/Alphabet (GOOGL-Highly Attractive, $1,190 Price Target)
• 2018 is a “prove me” year for Google. The main growth drivers and key
fuel in the engine for Google/Alphabet into 2018 remain mobile search,
YouTube, and overall advertising strength which have clear tailwinds
heading into 2018 in our opinion based on recent results and our ad survey
tracker work this quarter. To this point, we believe Google has a number of
organic growth investments that will start to bear fruit in 2018 as ad growth,
mobile impression strength, and a host of other initiatives lay out a
compelling growth story for Google in 2018 in our opinion. To reflect our
increased confidence in Google’s underlying growth drivers and our recent
checks into 2018 especially on mobile ad success, we are raising our price
target from $1,100 to $1,190, while maintaining our Highly Attractive rating.
• YouTube a major advertising asset. We continue to believe YouTube is
the major growth driver on the ad front, as this dominant platform now has
north of 1.5 billion users watching on average 60 minutes per day. As
Google further monetizes this “golden advertising gem” over the coming 12
to 18 months we believe this will be a major growth catalyst that is under
appreciated by investors in our opinion and a key driver of ad growth for
2018 and beyond.
• TAC remains the banner on the airplane that everyone is watching.
Importantly, Google’s advertising business and trends are showing
accelerating growth, as we saw TAC increase sequentially in its last quarter
Daniel H. Ives
917.210.3220
daniel.ives@gbhinsights.com
Copyright © 2017 GBH Insights
Page 8Technology Research
Industry Update
December 7, 2017
with mobile search driving this dynamic. We continue to believe that
improving TAC trends into 2018 are a major part of the Google narrative
going forward, as mobile advertising impression success holds the key to
the advertising kingdom in our opinion. Overall while initiatives around
hardware (Pixel), cloud (recent partnership with Cisco), AI, and Other Bets
(Nest, Fiber) are all important growth initiatives to expand the company’s
growth tentacles on both the consumer and enterprise front for 2018/2019,
it all comes down to stellar mobile search and advertising growth with
YouTube remaining a key under penetrated asset in the Google product
portfolio in our opinion.
• Biggest risk/concern heading into 2018: With the competition for mobile
ad dollars becoming fiercer it is becoming incrementally important for
Google to successfully monetize its search kingdom, YouTube asset, and
mobile impression success in 2018 as the coming year could be a huge
leap forward (or setback) for the company around monetization of its
platform. However, this will not be an easy task as we believe Google has
some more wood to chop ahead on its “bread and butter” advertising
platform/AI capabilities as mobile remains the gateway to its next phase of
growth with an increasingly more crowded and price competitive landscape
abound which represents an ongoing risk around the name.
Daniel H. Ives
917.210.3220
daniel.ives@gbhinsights.com
Copyright © 2017 GBH Insights
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