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Barclays: Our Top 5 Tech Stock Picks Going Into Earnings

We are now on the cusp of earnings season with hundreds of companies set to release their financial results in the coming days. In general, sentiment is cautious- Wall Street expects the S&P 500's earnings to fall by 2% compared to the same quarter last year. This would represent the first such decline since 2016.

However, Barclays has some good news for investors- and for tech investors in particular. The firm has just released a report revealing a bullish 2Q outlook for large cap tech stocks compared to previous prints. That’s thanks to a slew of factors.

Namely: 1) sentiment is mixed following multiple quarters of decelerating growth, downward estimate revisions, and increased regulatory scrutiny; 2) valuations remain well off the previous peak; and 3) acceleration from a couple of key companies (see below) should drive sentiment higher.

“In contrast to the pattern over the past 5+ years, the S&P is currently achieving new all-time highs without the leadership of large cap internet, and contrarians like us would view this as favorable for the current setup” writes top-rated Barclays analyst Ross Sandler.

With this in mind, the analyst sets out his five favorite Internet stocks for this earnings season. According to TipRanks, he is ranked #370 out of over 5,200 tracked analysts for his strong stock picking skills. Here are his five favorite stock picks now:

Amazon.com, Inc. (AMZN)

Out of all the internet stocks covered by the firm, Amazon is the number one stock for Sandler. The e-commerce giant is set to report its earnings figures on July 25. “AMZN is our top mega-cap long idea heading into 2Q - you own the name into retail revenue growth acceleration regardless of margin compression, full stop” the five-star analyst tells investors.

He is modeling for 2Q revenue of $63.3 billion and anticipates a modest acceleration for retail revenue growth. This is based on checks and data showing both organic acceleration and strong next-day shipping in several US zip codes. “3Q revenue guidance should similarly benefit from a full quarter of these trends and additional time for Prime Day” he adds.

However, Sandler does expect Amazon to guide below consensus for Operating Income (OI) in 3Q. Based on management's commentary that this year will return to normal pace of investment, the analyst writes “we think the street's $4.3B for 3Q is a bit aggressive.”

But at the end of the day, revenue acceleration trumps all. “In periods of accelerating growth, little else has mattered for AMZN shares historically” says Sandler. And looking out to the rest of 2019, Sandler reiterates his view that “Owning AMZN into accelerating growth in retail is a winning strategy in our view hence our optimism into 2Q, despite the step down in operating profit.”

In the last three months, no less than 35 analysts have published buy ratings on AMZN. Over the same period, only one analyst has stayed sidelined. Meanwhile the average analyst price target stands at $2,244 (11% upside potential).

Facebook, Inc. (FB)

Social media giant Facebook is the second top stock on the Barclays’ list. “FB seems actionable once again into 2Q as most long-only investors seem to be still watching from the sidelines, and we expect upside” enthuses Sandler.

In a report titled “Facebook: Too Cheap To Ignore” the analyst reveals that he expects FB to report both revenue and EPS above his estimate and consensus. Checks remain solid around both newsfeed and stories ad revenue for 2Q, says Sandler as he forecasts 2Q revenue of $16.8 billion. That’s with estimated DAU (daily active user) growth of 7% to a whopping 1.57 billion which “could prove a tad conservative.”

Bottom line: it’s worth adding to positions into the July 24 print. “As the conversation moves away from putting out privacy fires and back toward innovation, we think FB shares can continue to move higher” Sandler concludes.

Like Amazon, Facebook also scores a ‘Strong Buy’ consensus from the Street. That’s with 35 recent buy ratings vs 4 hold ratings. On average, analysts see the stock rising 9% to reach $221 in the coming months.

Spotify Technology SA (SPOT)

Music streaming service Spotify is out with its all-important numbers on July 31. “SPOT is likely to announce its new label agreements (removing a big overhang) and have solid premium net ads” predicts Sandler. The company is very close to the end of several months’ negotiation with major music labels, says Sandler, and could announce new agreements soon. This could easily act as a positive catalyst for prices.

He expects SPOT to report paid subscribers, revenue and operating income towards the upper half of its guidance range, and reiterate its full year range. Specifically, Sandler is looking for 109 million premium subscribers, with at least 9 million net subscriber additions. That’s with new partnerships, geographical expansion and increased penetration all helping boost subscriber growth.

“Shares have rebounded a bit since the December lows, but at 2.6x 2020 revenue and 9.5x GP, are still well below peer averages and the cadence of the business is improving” the analyst contends.

The Street has a cautiously optimistic ‘Moderate Buy’ consensus on SPOT. While 9 analysts call the stock a buy, 2 rate the stock a hold and 1 a sell. Their average price target works out at $168 (11% upside potential).

Uber Technologies Inc (UBER)

Ride-sharing stock Uber hit the markets in May with an unexpectedly disappointing IPO. In fact, Fortune reports that it was one of the worse-performing mega IPOs ever, with shares dropping 7.6% on the first day of trading. Things went from bad to worse when the company reported first quarter earnings and revealed a quarterly loss of over $1 billion.

So what can we expect this time around on August 8? “UBER is likely to report modest upside to consensus GBs, Revenue and EBITDA losses in 2Q and potentially provide a FY EBITDA target for 2019; we would add to positions into the print” advises Sandler.

In particular the analyst is looking for ‘robust growth’ in Uber Eats- the popular online food ordering and delivery platform launched by Uber in 2014. “UBER will likely accelerate in Eats revenue significantly this quarter” says Sandler, thanks to the new pricing model rolled out in mid-March. Uber split its fee into a delivery and service fee, and cleverly added a small order fee for orders under $10.

However Sandler thinks the real breakout will happen when Rides take-rate starts to expand more meaningfully in 2H19. This refers to the fraction of total fares that Uber skins from trips and deliveries. “At 4.5x 2020 revenue, we think UBER is one of the few names in our coverage that could see multiple expansion and upward estimate revisions over the next year” the analyst concludes.

Based on all the recent ratings, UBER holds a ‘Moderate Buy’ Street consensus. Twenty one analysts rate the stock a buy, and 8 analysts rate the stock a hold. The $53 average analyst price target translates into sizable upside potential of 22% from current levels.

Snap Inc (SNAP)

Photo-disappearing app maker Snap Inc has put on a whopping 178% year-to-date gain. Despite a disastrous 2017 and 2018, the company has come roaring back to life so far this year. And even at these levels Sandler is still optimistic about the stock’s potential.

“For the more risk-seeking investor we like SNAP here despite the near-triple YTD share price rise on the back of accelerating DAUs (but would watch buyside expectations closely into the print)” he comments.

True, DAU (daily active user) numbers may seem a little ‘frothy’ at current levels- and Sandler cautions that DAU may miss the high expectations. He is expecting 7 million daily active users versus the “+10m-15m DAU figure we've heard thrown around in buy-side conversations.”

“Nonetheless, we think the company has a lot of momentum currently on the back of Android and some of the new product releases (filters, games, etc), hence we continue to view SNAP as one of our favorite small to mid-cap long ideas for 2019” sums up the analyst. He is modelling for $355m in revenue- and an upbeat tone for 2H when the company reports on July 23.

The overall consensus on SNAP stock remains ‘Hold.’ Only 6 analysts call the stock a buy, with 14 hold ratings and 3 bearish sell ratings. Meanwhile the average analyst price target of $13 now undercuts the current share price by 13%.

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