COVID-19 has triggered an across-the-board sell-off in financial assets, and one of the hardest hit sectors among equities is the Internet space. One analyst at Mizuho Securities thinks the sell-off in the space may be overdone.
The Tech Analyst
James Lee has the following ratings and price targets for the Internet stocks in his coverage universe:
- Amazon.com, Inc. (NASDAQ: AMZN): Buy, $2,400
- Facebook, Inc. (NASDAQ: FB): Buy, $240
- Baidu Inc (NASDAQ: BIDU): Buy, $175
- Uber Technologies Inc (NYSE: UBER): Buy, $50
- Trip.com Group Ltd (NASDAQ: TCOM): Buy, price target reduced from $40 to $35
The impact of COVID-19 on stocks is transitory but given the uncertainty of an unknown epidemic, it is tough to call the bottom, Lee said. However, he recommends owning companies that either showed strong underlying trends in the fourth quarter or are in a position to benefit from travel restrictions, working remotely and a preference to stay in.
Specifically, Lee recommends buying Amazon, Facebook, Baidu and Uber, premised on his belief that the sell-off has exceeded their respective revenue exposure to the COVID-19.
Sell-Off Renders Amazon Attractive
Amazon is expected to benefit from increased demand for healthcare, grocery and consumer packaged goods products, Lee said. The analyst also sees opportunity for upside due to the extra day from leap year.
"With the stock selling off nearly 15% over the past two weeks, we view it attractive trading at 11.5x FY22E EBITDA, well below its estimated CAGR of 21%," Lee wrote in the note.
Ad-Boost Likely For Facebook
Facebook's exposure to travel is limited to low-single digits, Mizuho said. The firm expects the company's ad business to receive a shot in the arm from increased demand for games, entertainment and ecommerce.
While noting that the stock has sold off nearly 20% over the last two weeks, the firm said it now trades at merely seven times its estimated EBITDA for 2022, well below its compounded annual growth rate, or CAGR, of about 20%.
Baidu's Underlying Trends Strong
Baidu's fourth quarter revealed strong underlying trends, with the company beating core EBITDA estimates by 20% and experiencing price growth due to easing competitive pressure, Lee said.
"Engagement was strong during the epidemic for healthcare, Maps, and Q&A platform," he added.
The analyst is of the view the stock is undervalued.
Uber's Current Price Values Only Ride Business
Uber shares have retreated by over 30% and therefore is in oversold territory, Lee said. The analyst estimates airport-related trips could impact EBITDA by only 10%.
Meanwhile, the analyst expects increased demand in food delivery to reduce promotional spending, therefore cutting EBITDA losses.
"The current price implies value from only Rides business, with free call options in food delivery and freight businesses, in our view," Lee wrote.
Trip.com's Guidance At Risk Due to Travel Restrictions
Lee believes Trip.com's guidance for the first quarter and the consensus estimates for 2020 are clearly at risk due to travel restrictions imposed in the wake of the COVID-19 outbreak. The analyst expects a slow recovery in online travel, likely lagging the ecommerce and ad recovery by a quarter.
Assuming a full recovery only in the first quarter of 2021, Mizuho reduced its 2020 revenue growth estimate for Trip.com.