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The online advertising business is alive and well.
While regulators, prosecutors, and legislators scrutinize
Facebook
(ticker: FB) and Alphabet (GOOGL), Google’s parent, investors continue to find appeal in the stocks. They see substantial growth ahead for both revenue and sales.
Morgan Stanley
analyst Brian Nowak did a deep dive on the sector in a new research report, projecting 20% growth in online advertising in 2021. He named Facebook, Alphabet, and
Pinterest
(PINS) as his top picks, though he raised his price targets for a larger group of internet stocks:
- Facebook to $340, from $315
- Alphabet to $2,050, from $1,880
- Pinterest to $80, from $73
- Twitter (TWTR) to $50, from $42
- Snap (SNAP) to $46, from $36
- Quotient (QUOT) to $7.80, from $7.60
- Criteo (CRTO) to $16, from $13
- Yelp (YELP) to $26, from $19
- Zillow (Z) to $148, from $118.
Nowak said Morgan Stanley is anticipating a “check-mark shaped macro recovery,” with nominal growth of 7% in U.S. gross domestic product in 2021, and that strength in e-commerce will provide a tailwind to online advertising. The 20% growth in online advertising the bank is forecasting would be an acceleration from 16% in 2019 and 11% in 2020, he noted.
He also sees a shift toward shopping through social networks—a trend that would benefit Facebook, Pinterest, and Snap (ticker: SNAP). Nowak noted that a recent survey found 28% of Americans already use Instagram shopping on at least a monthly basis.
Nowak also notes that there has been a structural change in ad buyers’ behavior as homebound consumers shop online, speeding up advertisers’ move toward digital options and away from other alternatives. That is a potential source of growth in online advertising for years to come, he said.
One area to watch, he says, is growing interest from advertisers in how to benefit from the rise of short-form video platforms such as TikTok, Instagram Reels, Facebook Stories, and various others. “This growing short form video engagement combined with advertisers’ increasing interest [to] reach ad-supported video audiences creates a material new monetization lever to be monitored for all of these platforms,” he wrote.
As for his top picks, Nowak writes that he is most bullish on Facebook, anticipating a better 2021 performance than Wall Street expected. The stock is “GARPY,” he says, meaning it offers growth at a reasonable price. Shares trade for a modest 13 times Nowak’s estimate for 2022 earnings before interest, taxes, depreciation and amortization, or Ebitda, with 17% anticipated annualized growth through 2024.
He’s also bullish on Alphabet, particularly because he expects a recovery in travel advertising, which he says accounts for 12% to 15% of paid search, but also because of strong trends at YouTube. He also sees an appealing sum of the parts trade, noting that improved disclosures about Google Cloud are “shining better light” on an asset he thinks could be worth as much as $375 billion. He says the company’s parts together could be worth as much as $2,450 a share, representing upside of about 40%.
On Pinterest, he sees “the combination of new products/tools and consumer behavior shifting toward social shopping driving revenue upside.”
Facebook, Alphabet and Pinterest stock were all modestly higher on Tuesday. The
S&P 500
gained 0.5% by early afternoon.
Write to Eric J. Savitz at eric.savitz@barrons.com
— to www.barrons.com
