The tech-heavy Nasdaq has enjoyed a terrific 22% rally so far in 2019, with some high-growth tech stocks far exceeding the index. But such growth has left several key names looking dangerously overvalued.
Now RBC Capital has made the rare move of issuing a triple downgrade on three tech stocks. The firm’s Mark Mahaney explains that shares in these stocks have now achieved RBC Capital’s price target- and therefore can no longer retain their bullish ‘buy’ rating. That’s even though the positive long-term thesis remains firmly intact. Bear in mind that TipRanks ranks Mahaney #32 out of over 5,200 analysts for his strong stock picking skills- so it’s worth taking note of his latest downgrades.
With that in mind, let’s take a closer look at what Mahaney has to say- and whether the Street also sees these stocks as primed for a pullback:
Trade Desk Inc (TTD)
The first stock for the cut is online ad marketplace Trade Desk. The company's disruptive technology allows ad buyers to quickly and easily purchase digital ads from a wide spectrum of providers. Shares have dramatically outperformed the market; year-to-date TTD is up over 100% vs. the S&P 500 which is up 18%.
That’s largely due to consistently strong customer retention (95%+ for 22 straight quarters), strong adoption of its Next Wave platform (now at 80%+ adoption), and exposure to hyper-growth segments like Mobile Video, Audio and Connected TV.
“Given ongoing robust fundamentals that consistently top our “Crucial Combo” (revenue growth + profitability) spectrum, we believe this outperformance has been justified” writes Mahaney.
However as a result the stock has now achieved RBC Capital’s $220 price target. “Downgrading TTD to Sector Perform; Price Target Remains $220” Mahaney states. From current levels that suggests the stock can fall 6%. With the stock now trading at premium Saa Secular multiples, he sees risk-reward as less compelling right now but does add: “we would be constructive again on a material stock pullback.”
Indeed, the Street’s best-performing analysts have an even more pessimistic outlook for TTD stock with an average price target of just $202- indicating 13% downside potential lies ahead.
Roku Inc (ROKU)
Year-to-date Roku shares have made a whopping 200% gain- which sees the stock now trading at $91. Roku is one of the most popular TV streamer brands in the US, accounting for more than 30% of U.S. sales of connected-TV devices in the first quarter. According to Strategy Analytics, its lead over the No. 2 provider, Sony PlayStation, will reach 70% by the end of 2019.
“Per our recent Q1 EPS report, a key driver of this outperformance has been the acceleration of its high-quality and profitable Platform Revenue segment (with the 41% FY18 share price correction also creating an attractive valuation level)” writes Mahaney.
However, with the stock now trading at an intrinsically robust multiple, it’s time for a rating downgrade for RBC Capital. Indeed, Mahaney’s price target of $90 falls marginally below the current share price, suggesting 1.5% downside potential.
Nonetheless he continues to view ROKU as one of the best plays on ad-supported OTT, with the company being one of the best-positioned to take share of the very large, underpenetrated $70B TV Ad spend opportunity.
“ROKU has generated a very consistent financial track record thus far, and as the video ad spend migrates to over-the-top, we believe ROKU can sustain robust growth” concludes the analyst. Overall, it appears the Street echoes this approach- with an average top analyst price target of $91:
LendingTree Inc (TREE)
LendingTree is America’s largest online lending marketplace. It connects borrowers with multiple lenders so they can find the best deals on everything from loans and credit cards to deposit accounts and insurance.
Shares of TREE are now up almost 90% to trade at just over $415. According to Mahaney, the rally can be ascribed to better than expected performance in the Insurance and Credit Cards segments (with the 36% FY18 share price correction also creating an attractive valuation level).
Like with the previous two stocks, the analyst sees this outperformance as ‘fully justified’ but believes at these levels, risk is mounting. His $425 price target indicates only 2$ upside potential from current levels. More worryingly, the top analyst average price target suggests 4% downside for the coming months.
Yet ultimately the long-term bullish outlook remains- which is why the RBC Capital analyst recommends snapping up TREE if prices significantly fall. “TREE is a leading Online Consumer Finance Marketplace with a large/underpenetrated TAM, very strong secular tailwinds & a very consistent financial track record” cheers Mahaney.
Even in a challenging mortgage environment, TREE still generated leads for its mortgage loan partners. Plus he expects continued premium growth for the company’s Non-Mortgage sector. “We estimate Non-Mortgage to be 80%+ of total revenue in 2019 – this diversification has been and should continue to be a clear positive for TREE” he tells investors.