The last few years have been glorious for internet stocks. And unlike the dotcom bubble of the 1990s, these gains look like they’re here to stay. Internet companies have real sales, real profits and real growth to offer, thanks to the cloud.
However, this run does have many people questioning value. Cloud stocks have risen to extreme highs and valuations of 10 times sales are considered cheap.
In this kind of frothy environment, it makes sense to take something off the table — assuming you have profits to take. Gains from here should be based on long-term considerations. So, a big question for investors is this: where will the investment be 5 years from now or 10 years from now?
That’s what I tried to ask this week, as I wrote about companies involved in e-commerce and the cloud. Will these internet stocks still be sound investments down the road, when I’m ready to finally hang up my keyboard? Let’s take a look.
- Facebook (NASDAQ:FB)
- Equinix (NASDAQ:EQIX)
- ServiceNow (NYSE:NOW)
- VPC Impact Acquisition (NASDAQ:VIH)
- Amazon (NASDAQ:AMZN)
- Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL)
- Nvidia (NASDAQ:NVDA)
- Airbnb (NASDAQ:ABNB)
Internet Stocks to Consider: Facebook (FB)
Facebook has become a primary scapegoat for a lot of political tumult online. But this has created a buying opportunity in FB stock.
For instance, on Jan. 11, Facebook opened for trade at $260.48 per share. That looked cheap for one of the Cloud Czars among internet stocks. And that’s what this company is — it began building its network of cloud data centers a decade ago, before it really had the cash flow to afford it. Now FB’s cloud lets anyone take part in global discussion and the global market.
However, Facebook doesn’t just own data centers. It’s also building an undersea cable around Africa that’s nearly the length of the Earth’s circumference. Plus, it’s investing in new technology to drive down costs. For about 10 years, the company has been leading the Open Compute Project, dedicated to “reimagining hardware” with open source and shared solutions.
Finally, because FB owns its own cloud, it pays no rent. It doesn’t pay for content, either. Everything is built on cash flow from advertising. As a result, the company had manageable debt at the end of September and almost $56 billion in cash and short-term investments.
But, Facebook is also a huge concern of the government. If lawmakers want to regulate what content can go on FB’s platform, though, the company can deal with it. All that matters is the cost of that regulation.
As long as the company’s costs (like hiring content monitors) aren’t increased beyond its ability to provide free service, it will be fine. A regulatory regime will become a moat keeping competitors out. What’s more, American policymakers will tread lightly because, at least right now, it’s an American moat.
Facebook has been careful to site a lot of its data centers in the U.S. as well as in compatible parts of the world. That means basically only the U.S. government can hurt it, which would be at enormous expense to American interests. After all, do we really want China’s Cloud Emperors running the world’s communications network?
Expect a negotiated settlement.
If you want income from your cloud investment, but still want cloud exposure, consider Equinix. Just be prepared to pay a cloud-high price for this pick of the internet stocks.
Equinix is a data center real estate investment trust (REIT). It builds or buys data centers with debt or equity and its profits go directly to shareholders. What’s more, EQIX’s data centers connect its customers to public clouds as companies evolve them into private clouds.
On Jan. 12, EQIX stock opened at $681.33 per share. Now over $725, it has a market capitalization of $64.6 billion on estimated 2020 revenue of $6 billion. That said, its dividend yield is a paltry 1.49%. However, Equinix can still pay off for conservative investors.
While other REITS have been crashing in 2020 — despite being designed to deliver income — Equinix has risen 23% over the past one year. Its tiny-yield dividend has also actually doubled over the last five years.
On top of that, over the last five years Equinix has delivered total returns of about 170%. Equinix is the largest player in its field and right now, it’s on sale. The shares peaked at over $830 in October and even continued heading down after beating estimates. Currently, they’re down about 14% from the 52-week high.
Finally, though, a big reason to consider REITs like Equinix is because they play a vital role in the cloud ecosystem. When a market is too small or too risky for a “hyperscale” data center like from Amazon or Microsoft (NASDAQ:MSFT), REITs fill the gap. And Equinix is expanding on its ability to fill that gap, currently putting $161 million towards its footprint in India, for example. It also recently invested in centers near D.C. and in Osaka, as well as elsewhere.
So, put some EQIX stock away and see me in five years. You can buy the coffee.
ServiceNow is now one of the hottest cloud services application companies among internet stocks. Since former SAP (NYSE:SAP) executive Bill McDermott became the company’s CEO in November 2019, NOW stock’s price has more than doubled. For comparison, its rival Salesforce.com (NYSE:CRM) is up just 32% in that time.
Right now, ServiceNow trades at $536 per share with a market cap of over $104 billion and an eye-popping trailing price-earnings ratio of 145. That’s also about 23 times its estimated 2020 revenue of $4.4 billion. The company first came public in 2012, a month after Facebook. Now those who bought it instead of FB look like geniuses.
NOW’s niche is powerful because it provides cloud software for developing cloud software. Right now, the company’s 2020 sales growth rate is about 29% and revenues have tripled since 2016. What’s more, McDermott calls companies like SAP “cement makers” — he doesn’t see them as competitors, but as “systems of record” which ServiceNow outpaces.
Talk like that has analysts calling the company “the next big name in enterprise cloud.” Of 23 analysts following this pick on Tipranks, 22 have it as a buy. Their average price target of $597.86 is 11.6% ahead of where the stock is now. Bulls say the company’s subscription model creates earnings visibility and is still in the early innings.
NOW is one of those companies that has nowhere to go but up. So, if you have a 10-year time horizon and are seeking capital gains, you can buy this stock with confidence.
VPC Impact Acquisition (VIH)
Bakkt is a “digital assets” marketplace built on a wallet app that “currently supports more than 30 loyalty program sponsors and 200 gift card merchants.” For example, Starbucks (NASDAQ:SBUX) has integrated Bakkt Cash as a way to pay in its mobile payment app.
This pick of the internet stocks is going public through a special purpose acquisition company (SPAC) called VPC Impact Acquisition. The deal values the company at $2.1 billion and the new company will be listed on the New York Stock Exchange. Importantly, Intercontinental Exchange (NYSE:ICE) — the majority owner of Bakkt — also owns the NYSE.
What makes Bakkt so attractive is actually simple: the idea is that the app can combine various forms of payment into a single system. This includes gift cards, in-game assets, loyalty points, airline miles, stocks and derivatives as well as cryptocurrency. According to a VPC presentation on the company, the alternative assets represented $1.6 trillion in value last year and a total addressable market of $5.1 trillion in 2025. Moreover, Bakkt currently has about 100,000 active users with 350,000 more “waiting to be turned on.”
However, while CEO Gavin Michael says the company will support crypto assets beyond Bitcoin, Bakkt won’t have the crypto market to itself. For instance, Paypal (NASDAQ:PYPL) is rolling out support for crypto in its system. So, the key to Bakkt may be its roll-up of non-cash assets like loyalty programs and in-game points. This gives it additional asset base outside of crypto and makes VPC stock a solid prospect.
Over the last three months, shares in Amazon are down a tad, at about 1%. But that points to a natural evolution in AMZN stock. At some point, growth becomes value.
At its current price of about $3,230, Amazon is worth $1.6 trillion. That’s a trailing price-earnings ratio of over 91 times. It’s also about four times the company’s expected revenue of $380 billion for 2020.
A level like that is ridiculous for a retailer. But it’s dirt cheap for a tech stock. For instance, Oracle (NYSE:ORCL) sells for 4.6 times sales and Microsoft sells for nearly 11 times.
Amazon is due to report earnings for the December quarter on Jan. 28. Analysts are expecting a super-sized Christmas, with earnings of $7 per share and sales of $120 billion. Compare that to last holiday season, when sales were $87.4 billion. At its current rate of growth, Amazon could be bigger than Walmart (NYSE:WMT) in 2022.
What’s more, analysts haven’t fallen out of love with this giant of the internet stocks. Out of 32 analysts followed on Tipranks, 31 say buy it. Their average price target of $3,816 represents a 17.9% increase from where AMZN is now.
Finally, Amazon is also currently a leader in a diverse group of fields — from groceries to entertainment to unmanned delivery. It even plans to spend $2 billion on building affordable housing near its offices and is rolling up third-party sellers into companies of its own making. InvestorPlace’s Louis Navillier says AMZN stock is priced right and I agree. What’s happening is a natural rotation, as investors pile in and speculators seek fatter gains elsewhere.
At some point, the company might even split the stock and declare a dividend. It might also split its store out from the cloud. That’s when the name’s evolution into a value stock among internet stocks will be complete.
Don’t be evil — the old corporate mantra of Alphabet — seems quaint now. That’s because this big name among internet stocks has been suddenly beset by critics worldwide. They see it as an epitome of wrong. Right now, the company’s facing governments without its halo.
In fact, there are two antitrust cases against Alphabet just in the States, targeting its dominance of search and online advertising. What’s more, its workers are organizing a union.
But despite this, the money keeps rolling in from every side. The company will report its Q4 earnings on Feb. 1, with expected revenue of $41.85 billion. And it might even clear that bar.Back in October, I called the stock overvalued, but since then it’s up about 20%.
However, at the heart of Google’s problem is the political power that comes from its search algorithm and YouTube platform. The latter uses a common technique, giving people more of what they say they want. That can lead to a wealth of knitting sites and cat videos, but can also take users down a conspiracy theory and political rabbit hole.
So, when enjoyed by billions, Google algorithms can wound whole industries. As part of the reaction, journalists are now demanding the company pay for links to their stories. Moreover, governments are following that chase for money and the news cycle may just be the start.
Everything Google does is now subject to pushback. For example, it took over a year for the company to close its acquisition of FitBit. Even simple browser updates are now subject to regulation. Google has responded by putting greater focus on Google Cloud, where it rents its infrastructure, platform and applications. It also recently opened in new regions across the world. What’s more, Google Cloud revenues are now growing faster than that of Amazon or Microsoft.
However, companies earn fat price-earnings multiples because they deliver superior growth. GOOGL stock’s growth estimates have averaged 15% for the past five years. Yet, its trailing PE is above average at 34.48. So, it’s hard to see Google’s growth rate doing anything but slowing.
Next on my list of internet stocks is Nvidia, one of those companies that can make any humble reporter look like a genius.
Back in 2016, I called it a “bullet train” when the shares passed $100. Then in 2019, I also pointed out how not all of its success was tied to gaming. That’s when I finally took my own advice — shares I bought for $157 in 2019 opened Jan. 15 at $529.
A big part of what pushed Nvidia shares over $500 was the agreement to buy Arm Holdings from Softbank (OTCMKTS:SFTBY) for $40 billion. Arm designs can be found inside Apple (NASDAQ:AAPL) chips, as well as in the chips of other Cloud Czars. The deal puts companies like Intel (NASDAQ:INTC) and even Advanced Micro Devices (NASDAQ:AMD) squarely in Nvidia’s sights. However, since the agreement was announced, shares have been stuck in a trading range.
Why? One reason could be skepticism around if the deal will ever go down. That’s because regulators in many countries must approve it. For instance, China has been slow-walking tech acquisitions. Additionally, the new administration under President Joe Biden may not be happy about big tech deals.
Then there’s the valuation. Nvidia is now worth roughly $330 billion. Its sales for the current year are about $16.5 billion. Moreover, its price-earnings ratio is over 85 and its dividend yields just 0.12%. Add in Apple’s move towards its own chip design as well as Intel’s recent effort to get its act together and there are reasons for concern.
But none of this has chased out bullish sentiment. Of the 18 analysts following NVDA stock at Tipranks, 14 still call it a buy with an average price target of $599.24. That’s 12.3% above the current price. Valuewalk even dubbed it the “slam dunk” of the decade.
So, NVDA is still a great long-term holding. But, when an investor sees a big gain, it’s wise to take something off the table. That’s because you don’t really have a profit — in any security — until you sell it and have cash in hand.
Last on my list of internet stocks is Airbnb. This is a company that has essentially created a new industry — and some good-paying jobs, to boot. Of course, ABNB stock is not perfect. But there’s huge potential here to remake the lodging industry.
I’m just not paying 24 times revenue for it. Currently, the company’s shares trade at about $167. That’s a market cap of $99.7 billion, on 2019 revenue of $4.8 billion. (Of course, I report 2019 here because 2020 will be short of that mark and we want to be fair). For comparison, Booking Holdings (NASDAQ:BKNG) has a market cap of $87.7 billion on 2019 revenue of $15 billion.
The company became public on Dec. 10. It’s initial $68 IPO price looked rich. However, by the end of the day, it was trading at just over $144. So far, the stock has managed to hold and exceed that level. Back in December, I thought the initial price looked high, but now its more than twice that.
InvestorPlace’s David Moadel calls ABNB’s business model resilient, noting the enormous pent-up travel demand. He’s right. But after the return to normal — and after the rush to go somewhere has worn off — can this company keep growing?
Like many e-commerce companies that have disrupted their industries with new business models, Airbnb takes as much as it gives away. Mostly, it takes prime real estate off the market. More specifically, speculators can often make more off Airbnb listings that are occupied seasonally than with regular rentals. So, cities, states and countries are soon going to be regulating this.
Then there are companies like Booking and Expedia (NASDAQ:EXPE). They’re getting into this business, too, and it’s not especially hard.
While ABNB says it can win with “experiences” — getting local people to act as tour guides and craft teachers — it’s more likely that this will create new scaled businesses with agents taking most of the money and guides becoming like Uber (NYSE:UBER) drivers.
So, how much will Airbnb be worth in 2024, especially as larger companies jump in? Right now, most analysts don’t know. Some even see the company continuing to lose money next year, on about $4.5 billion in revenue. Based on that, I think Booking is a better “internet stocks” buy here.
On the date of publication, Dana Blankenhorn held positions in AAPL, NVDA, AMZN, MSFT and CRM.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.