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Earnings season is in full swing, and if you haven’t started shopping the tech sector, now’s the time to start thinking about it.
Google parent Alphabet (NASDAQ: GOOG, GOOGL) has already delivered strong results. Netflix (NASDAQ: NFLX), however, missed on its subscriber growth numbers, and while its results were otherwise pretty good, the stock took a dive.
And then there’s Facebook (NASDAQ: FB). It seems the company’s scandals have finally caught up with it as it missed expectations on revenue and showed slowing user growth. Its weak forward guidance spooked investors and the stock crashed 19% and wiped out $120 billion in market cap in a single day.
But for Goldman Sachs, the tech sector remains one of the most attractive investment opportunities as the future of this sector is bright amid pushes into cloud computing and the consumer transition to online shopping, among other technological developments.
Heath Terry, a Goldman Sachs analyst, had this to say about why he’s especially bullish on the e-commerce and online advertising spaces.
“Market share gains in online retail and digital advertising continue to drive fundamental outperformance in Internet, with Street revenue estimates for 20 out of our 28 covered Internet companies increasing following 1Q results and, importantly, for 6 of 9 non-travel large caps. This is being driven by trends in e-commerce and online advertising partly offset by a challenging environment for online travel intermediaries, in our view. E-commerce growth has moderated in the recent quarters but remains elevated as US desktop e-commerce growth reached +20% yoy in 1Q18 (+20% in 4Q17) vs. +20%/16% in the first quarter of 2017 and ’16, per comScore.
“As multi-channel retailers and e-commerce pure-plays continue to invest in fulfillment and historically challenging (but large) categories move online, we expect online market share gains to accelerate (+147bps in 2018E vs. +134bps in 2017E) while global share gains remain robust (+150bps next 3-yrs on avg. vs. +130bps the previous 3-yrs). We believe these gains will reinforce further e-commerce growth globally and see significant growth opportunities for covered companies.”
Goldman says these three stocks are the key players to watch.
PayPal (NASDAQ: PYPL)
PayPal (NASDAQ: PYPL) stock has been soaring under CEO Dan Schulman. The stock is up nearly 52% this year, and 10.5% just this month.
Activist investor Dan Loeb at Third Point says there’s 50% upside in PayPal’s stock in the next 18 months. He believes that the stock could become the next Netflix or Amazon in the digital payments sector.
“We see parallels between PayPal and other best-in-class internet platforms like Netflix and Amazon: High and rising market share, untapped pricing power, and significant margin expansion potential,” Third Point said in a letter to investors.
It was revealed Monday by Bloomberg that Third Point had taken a stake in PayPal, and Loeb is likely right to get in on the stock now.
Since spinning-off from eBay (NASDAQ: EBAY) in 2015, the stock has exploded more than 150%. Since then, CEO Schulman has led the company’s transformation which has seen it expand aggressively. PayPal has a growing global footprint, and is diversifying into brick-and-mortar retailers in addition to its digital payments platforms, including the popular Venmo app.
Its acquisitions spree has positioned PayPal as the leader in the mobile payments space now and in the future. And that acquisition spree is set to continue as Schulman recently reiterated that the company plans to spend between $1 billion and $3 billion per year on acquisitions for the next few years to solidify its dominance.
Amazon (NASDAQ: AMZN)
Amazon (NASDAQ: AMZN) just crushed Wall Street’s profit forecasts for the second quarter in its report Thursday.
The digital retail giant and cloud services provider posted profits of $5.02 per share compared to the estimate of $2.49 per share. It’s revenue also clocked in at $52.89 billion, up 39% year-over-year, and the revenue from its Amazon Web Services (AWS) unit came in at $6.1 billion, 49% higher than the same quarter last year.
It’s sales growth also accelerated in North America, internationally, and for its Amazon Web Services. And operating profit margins surged to 5.6% from 2.8% last year.
The high-margin AWS arm of Amazon helps to finance the company’s low-margin retail business and is largely responsible for the incredible gains in the stock price over the last few years.
Amazon is the dominant e-commerce force and has been one of the top large-cap tech performers the last few years. The stock is currently sitting at 72% growth for the year, and nearly 55% year-to-date.
But shares surged to an all-time high this week, adding $50 billion in market cap, after it reported Q2 earnings that crushed Wall Street’s expectations.
The company delivered better than expected results for the second quarter driven by search, YouTube, and Google’s rapidly-growing “other” segment.
In the second quarter, revenue jumped 26% to $32.7 billion, operating revenue rose 24%, earnings per share climbed 32% to $11.75 per share, crushing analysts’ consensus of $9.66.
And its “other” segment’s revenue grew 37%. This segment includes revenue from cloud services, the Android app store, and its hardware offerings.
“There has been a change in the Alphabet story. Investors have gone from being skeptical about the growth in operating expenses and capital expenditures to endorsing them now that they’re bearing fruit with strong revenue growth,” said Evercore ISI analyst, Anthony DiClemente. DiClemente rates the stock as an Outperform and has a price target set at $1,350 per share, 6% higher than today’s closing price.
From a technical perspective, Todd Gordon, founder of TradingAnalysis.com, sees the stock rocketing much higher to north of $1,500 and potentially as high as $1,700 – prices that would push Alphabet to the elusive $1 Trillion mark.
“You have a beautiful uptrend parallel channel here, which should serve as resistance if Google gets a bid. That level doesn’t actually come in until you’re up around $1,600 to $1,700, so we certainly have room to go over the next year,” Gordon said.