The 20th century’s third decade came to be known as the roaring 20s. It was a period characterized by economic prosperity and cultural activity that saw massive development in movies, radio, cars, telephones, and electrical appliances.
Will the 2020s have a similar impact? The decade follows a record breaking 10 years in the market, with accelerating new tech developments and our lives connected by the world wide web.
In a recent note to clients, Baird analyst Colin Sebastian lays out some thoughts on the incoming decade and the role the internet will play in it. Additionally, the analyst makes the case for the company’s top internet picks for the year ahead.
Sebastian said, “After a bustling decade highlighted by mobile apps, cloud computing and AI/machine learning, the Internet sector remains, in our view, an attractive area of investment. We see a bounty of meaningful technology transitions on the horizon - some more disruptive than others - creating new opportunities and risks, but presumably leading to faster and more useful applications that are accessible to a greater number of people.”
With this in mind, we used TipRanks’ Stock Comparison tool to line up the 5-star analyst’s two picks alongside each other to see what the early 2020s have in store for both. Let’s browse the details.
Amazon.com Inc. (AMZN)
As everyone knows, what begun as an online bookstore is now one of the world’s biggest companies. According to Sebastian, one of the reasons Amazon remains so appealing is its status as an all-encompassing platform, highlighting Amazon’s “widening scope of operations and expanding market opportunities.” Apart from e-commerce, Amazon has a foothold in cloud computing, logistics, advertising, and streaming.
While Amazon’s online shopping store is the segment it is still most identified with, and one set to provide further growth, other parts of the operation are not lagging behind; Having done away with external logistics companies to take care of deliveries, Amazon is on its way to becoming one of the largest logistics and transportation companies in the US. Furthermore, Amazon’s advertising revenue is estimated to reach $17.6 billion in 2020, which will represent growth of 36% year-over-year. This figure could rise to $46 billion by 2025, according to the estimates.
What could drive Amazon’s long-term growth more than anything, though, is its cloud computing segment. Despite AWS sales only accounting for $25.1 billion of the $193.1 billion in net sales through the first three quarters of 2019, the service is growing much faster than its e-commerce counterpart and is already generating more operating income. Compared to the prior-year period, in the first nine months of 2019, AWS has grown by 38%.
While 2020 will see more regulatory concerns regarding big tech companies, Sebastian plays down their impact and thinks the "bark" is probably bigger than the "bite". The analyst cites “slowing innovation” and “management distraction” as bigger risks.
Sebastian concludes, “We highlight AMZN given ongoing secular e-commerce strength; relative underperformance of shares vs. mega-cap peers; improving margin optics beginning in Q2/2H; and significant growth opportunities in commerce, shipping/ logistics, advertising, cloud, payments, and international.”
It’s not surprising to learn, then, that Sebastian reiterated an Outperform rating on Amazon, along with a price target of $2,080. This conveys the 5-star analyst’s belief that Amazon can add an extra 11% to its share price over the next year. (To watch Sebastian’s track record, click here)
As it happens, the Street is even more bullish than the Baird analyst. A Strong Buy consensus rating breaks down into 39 Buys and a single Hold. With an average price target of $2,149.94, the Street sees another 15% being added to the e-commerce giant’s share price in the next 12 months. (See Amazon stock analysis on TipRanks)
Sebastian’s other Top Pick is social game developer, Zynga. Zynga’s most famous game is Farmville, which was the first game on Facebook to reach 10 million daily active users. Other titles include Zynga Poker and Words with Friends.
Sebastian said, “Mostly, we like Zynga for the visibility from live services, new title launches, potential for more M&A, and 2H improvement in EBITDA margins. Also, we note console transition-year volatility is a bigger near-term risk for traditional game publishers.”
The 5-star analyst kept his Outperform rating on Zynga, alongside a price target of $8. Investors stand to take home a 28% gain should Sebastian’s thesis play out.
Zynga IPO’d in 2011 and since then, its share price hasn’t been as high as during its first few months as a public company. 2019, though, saw it trading back at levels not seen since 2012. Zynga outperformed the market last year, gaining 56%, as well as posted encouraging figures in its latest earnings report; 3Q19 represented the best quarterly revenue and bookings in its history. This prompted the company to boost its revenue and bookings guidance for all of 2019 for the second time in a year.
The growth comes off the back of some big acquisitions; Zynga bought Gram Games for $250 million in 2018 and followed that up with the $560 million purchase of an 80% stake in Small Giant Games. The former is the creator of the popular Merge Dragons, while the latter counts Empires & Puzzles among its titles.
Cowen’s Doug Creutz is a fellow fan of Zynga. The 5-star analyst also named Zynga as a ‘’best idea for 2020’’ and called it "the most consistent company in the mobile gaming vertical over the last few years." Creutz, too, reiterated an Outperform rating on the game developer, and kept his $7 price target. (To watch Creutz’s track record, click here)
So, what does the rest of the Street think of the analysts’ top pick for 2020? Zynga has a Moderate Buy rating, which breaks down into 3 Buys, 2 Holds, and 1 Sell. An average price target of $7.03 indicates possible upside of 15%. (See Zynga price targets and analyst ratings on TipRanks)