With earnings imminent, Jefferies is tackling reports among the biggest digital advertising players, and noting things have changed since the third quarter, with investor sentiment having deteriorated "significantly."
As high-flying tech has sold off to start the year, valuation multiples vs. the broader Nasdaq have gotten close to two-year lows, analyst Brent Thill and team write.
And ahead of earnings, it's banking on a familiar pair. Meta Platforms (NASDAQ:FB) and Alphabet (GOOG, GOOGL) look "attractive" not only because of valuation, but also a better ability to weather ad privacy changes (launched by Apple in its iOS) that have buffeted the sector.
For Meta (FB), while Jefferies sees some mixed channel checks and sees the fourth quarter in-line or slightly higher than Street expectations (for 19% growth year-over-year), it figures there could be a "more pronounced" slowdown in the first quarter: "We would not be surprised to see FB guide Q1 rev below the street's +15% y/y growth with headwinds coming from supply chain shortages, Omicron uncertainty, and ongoing privacy headwinds."
The Apple privacy issues are still a challenge, but checks show Meta has made good progress on getting advertisers to adopt workaround solutions, so the worst may be behind. Combine that with some easing comparisons in the second half, and revenue growth could accelerate in the third and fourth quarters of 2022. The stock's multiple of 18x 2023 EPS is nearing its largest historical discount to the Nasdaq, the firm says. Jefferies' $420 price target imply 34% upside from yesterday's close.
Checks on Alphabet (GOOG, GOOGL) are showing "relatively healthy" fundamentals vs. the other names, particularly due to strong results in YouTube, and "solid" Search (both brand and direct-response advertising), Jefferies notes. But the situation may be high floor/low ceiling, as the overall tone is still "muted."
As with Meta, Alphabet will face tough comps in the first half, and meanwhile, advertisers will be slow to spend their 2022 budgets, and online traffic is reverting more from pandemic numbers toward the mean. Still, it too has an attractive sub-market valuation (12.2x multiple on 2023 enterprise value to EBITDA, vs. 12.4x for the market) and the secular shift to digital advertising favors the company. Jefferies has a $3,500 target on GOOGL, implying 29% upside.
Snap (NYSE:SNAP) is a mixed bag, the firm suggests. Intra-quarter checks show headwinds weighing on revenue growth, including the usual suspects (COVID-19 Omicron surge, supply chain shortages, and the iOS privacy changes). But Jefferies says Q4 guidance for 30% year-over-year revenue growth (or up 11% vs. historical average) looks "conservative" and largely accounts for the headwinds.
Meanwhile, daily active users look to be trending above Street expectations, Jefferies says, suggesting that Snap and TikTok (BDNCE) can both grow in tandem. And another familiar refrain: Valuation is well below historical average (at 6x 2023 revenue) and the stock is down 35% in 2022 so far, suggesting "most of the risk is embedded." A buy rating and $55 price target implies 69% upside.
Finally, it says Twitter (NYSE:TWTR) could face a challenging Q4 particularly with the past few months' management transition and subsequent reorganization. Jefferies is "still waiting for signs of an inflection," with user growth deceleration suggesting it will be hard to meet a 2023 target of 315 million monetizable daily active users. And Twitter's guidance wasn't as conservative as that of its rivals, with a forecast of 23% growth for Q4 from the third quarter (vs. Meta's 14% guidance, and Snap's 11%). Its multiple is at a 24% premium to Meta's. Jefferies has a Hold rating and $40 target vs. yesterday's close of $37.51.
Meta (FB) reports after the close on Wednesday, Feb. 2; Consensus expectations are for EPS of $3.83 on revenues of $33.44 billion. Alphabet (GOOG, GOOGL) reports tonight, Feb. 1, after the close; it's seen reporting EPS of $27.35 on revenues of $71.81 billion.
Snap (SNAP) posts its earnings Thursday after the close; it's expected to report EPS of $0.10 on revenues of $1.2 billion. And Twitter (TWTR) doesn't come until Feb. 10 at a new premarket slot; it's seen with non-GAAP EPS of $0.35 on revenues of $1.57 billion.