Internet stock investors have had plenty to consider in 2019. The continued growth of online advertising, cloud computing, and e-commerce have been tailwinds for many businesses in the space. A steady stream of startups have gone public this year, adding names to the investible universe. And increased regulatory and antitrust scrutiny of the largest players has begun to threaten some business models.
On average, internet stocks such as
(SPOT) are beating the
index in 2019. That is despite a losing year for names including
(TRIP). As a group, internet stocks covered by J.P. Morgan have posted a weighted-average rise of 30% this year, ahead of the S&P 500’s 27%.
Next year will bring a new host of issues and opportunities. J.P. Morgan’s Doug Anmuth said in a report on Tuesday that some of 2019’s initial public offering flops will get their chance to shine in 2020.
(UBER) and Lyft are each down about a third from their offering prices, as investors have grown skeptical of their money-losing, rapid-growth strategies. The ride-hailers’ shares were further pressured by concerns over regulatory challenges to the companies’ labor models, under which drivers are classified as contractors instead of employees.
Anmuth is bullish on Lyft, as he sees increasing rationalization of the ride-hailing market in 2020—meaning fewer coupons, discounts and promotions for riders and drivers—and higher revenue per ride for Lyft as a result. Add some gains in market share and he models a 33% rise in revenue for Lyft next year, to $4.8 billion, and wouldn’t be surprised if the company broke even on its core business in 2020. Lyft management has said it expects to turn a profit by the fourth quarter of 2021.
Anmuth has an Overweight rating, the equivalent of Buy, and an $85 price target on Lyft stock, about 77% above its recent $48.
A more recent IPO is growing even faster:
(PTON). For the spin-bike startup’s current fiscal year, which ends in June 2020, Anmuth forecasts 62% revenue growth, to $1.5 billion. That is on the high end of the company’s guidance, but Anmuth sees several tailwinds for Peloton’s business over the next year.
“Peloton is well positioned for multiple beat and raise quarters,” Anmuth wrote on Tuesday. “We believe drivers include bike home trial, international markets, marketing around 0% financing, and content enhancements.”
Anmuth rates Peloton shares Overweight. His $34 price target is 8% above the stock’s recent $31.40.
Among the megacap internet players—
(AMZN), Facebook, and Google parent Alphabet—Anmuth sees a push for greater diversification of revenue and earnings. Amazon is the most diversified on both lines, with its retail business bringing in 81% of revenue and 10% of operating income, Amazon Web Services accounting for 14% and 57%, respectively, and advertising bringing in 5% and 33%, according to Anmuth’s estimates for 2020. Google earns 82% of its sales from advertising, while Facebook is at 99%.
All three should continue feeling pressure from governments and regulators around the world. The U.S. Justice Department and state attorneys general are looking into antitrust concerns raised by businesses and customers, while separate investigations are proceeding in the European Union. Several 2020 presidential candidates have supported breaking up Big Tech companies. Data-privacy legislation goes into effect next year in California, and digital-services taxes are being contemplated in various countries.
Anmuth is nonetheless Overweight on Facebook and Amazon for 2020. At Facebook, he notes strong growth at Instagram, increasing monetization of stories, and new diversification initiatives such as Facebook Pay and Instagram shopping and checkout. Anmuth sees Facebook stock’s price-to-earnings multiple expanding from its current 17.7 times 2021 earnings per share to 23 times his $10.97 2021 estimate. That could push the stock about 29% higher to his $255 price target.
Amazon’s push to introduce one-day shipping on Prime items should drive e-commerce order and revenue growth next year, while its Amazon Web Services unit can continue to benefit from a shift to cloud computing. Anmuth expects overall public-cloud spending to triple in the next four years. AWS is decidedly the market leader, with about double the scale of
(MSFT) Azure, and quadruple that of Google Cloud. Anmuth expects greater competition among the three in 2020, but for AWS, nonetheless, to increase its sales by 30% to $45 billion. That should help push Amazon’s total sales 19% higher next year, to $332 billion.
Anmuth’s $2,200 price target is about 23% above Amazon stock’s recent $1,782.
Write to Nicholas Jasinski at [email protected]