Everyone loves a surprise. That includes RBC Capital internet analyst Mark Mahaney, who on Wednesday issued his New Year’s Day list predicting 10 “internet surprises” for the year ahead.
The 2020 list comes a week after Mahaney outlined his top internet stock picks for 2020, and reflects some of the same themes. Among them is a bullish stance on
(LYFT) and the whole batch of sagging 2019 internet initial public offerings.
Here’s the new list:
Netflix subscribership accelerates in 2020: Mahaney sees this more as a possibility than a probability. It certainly would run counter to the conventional wisdom. He noted that in the U.S., comparisons will be relative to a year in which
(NFLX) increased its prices materially, and reduced marketing spending. The company also is likely to benefit in 2020 from a further crumbling of cable and satellite subscriptions, Mahaney said. “Netflix in 2020 is launching 130 new local language/content series that could provide a material boost to sub growth in [international] markets,” he added.
Alphabet’s operating margins are flat to higher: Mahaney noted that operating margins at
(GOOGL), Google’s parent company, fell to 22% in 2019 from 26% in 2016. Profit growth has trailed behind revenue growth. Mahaney sees a potential surprise on margins in 2020, driven by growth in Google’s cloud business and the possibility that new CEO Sundar Pichai will take a more rational approach to the company’s money-losing “Other Bets” segment. If that happens, he said, the stock could “materially outperform.”
Uber and Lyft reach profitability in 2020: He noted that both companies have committed to breaking even in terms of earnings before interest, taxes, depreciation, and amortization in 2021, saying it is possible that one or both reach that level this year. He thinks the odds are better for Uber, given that it has greater scale and the option to close materially loss-making operations such as Uber Eats in India.
2019’s IPOs roar back: He noted that almost every internet company that went public in 2019 fell below its IPO price. He thinks sentiment has become too negative on some of them, including
(CHWY), as well as Uber and Lyft.
Election 2020 is decided by the internet: Mahaney wrote the same thing in his January 2016 list. Does anyone want to argue? “We believe the financial markets under-appreciate how increasingly influential as political ad spend channels the major Internet companies have become. Specifically, Facebook and Google.”
No major regulatory action is taken against the big internet companies: “We are especially skeptical of the possibility that one of these companies will be required to divest a key segment … and we continue to be impressed by what we see as the clearly positive impact these three companies have had on consumers – and on advertisers and merchants — over the last many years, which would work to undermine major antitrust investigations,” the analyst wrote.
Amazon’s profitability plummets. Mahaney says the company could aggressively invest in one-day delivery, physical stores, and the sales force at its Amazon Web Services business, potentially leading to a near-term decline in operating margins.
At least one company starts paying a dividend: Expedia, IAC and eBay are already dividend payers. He thinks the list could expand, citing Alphabet,
(FB), and Booking.com’s parent company,
(BKNG), as potential candidates.
The “iBuyer” real-estate sector shows both growth and profitability, benefiting Zillow and Redfin: This is the newly emerging niche of buying and flipping homes. Mahaney notes that the business has been growing rapidly but unprofitably so far. He says that as a result of economies of scale in buying, selling, holding, and improving homes, there could be a shift that would allow the businesses to become modestly profitable. It’s an outcome Wall Street isn’t really expecting
Spotify concludes label negotiations, and the “two-sided market” and gross margins both expand: This one is a little complicated. Spotify has been negotiating new distribution deals with two of the four major music labels. The two-sided market is a reference to offering marketing and promotion ad units to artists and labels. Gross margins have been flat at Spotify in the 25%-26% range. Mahaney says that while the market has been disappointed at the company’s inability to improve those figures, he thinks there is a chance that Spotify will surprise Wall Street with margin growth in 2020.
Write to Eric J. Savitz at email@example.com
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