Let’s acknowledge right out of the gate that 2022 was a “disaster” for a lot of stocks, especially internet stocks.
Will 2023 be any better? No one knows.
But it’s always worth turning to the professionals who are well-paid to try to answer those kinds of questions.
We’ve got access to four favourite internet stock ideas from a research team, along with a sprinkling of other names that they like.
The title of this abbreviated report is 2023 Internet Outlook: Bringing Secular Back?
For those of you not familiar with Justin Timberlake’s song catalogue, it’s a mildly clever take on a hit he had several years ago called SexyBack.
Secular as in these companies are driven by forces that are likely to remain in the foreseeable future and are sometimes separate from overriding economic and market trends.
2023 Internet Outlook: Bringing Secular Back?
by RBC Capital Markets
(Definitions for a few acronyms used in this report: SMB – small, medium-sized business, ATT – app tracking transparency, IDFA – identifier for advertisers, AWS – Amazon Web Services, GCP – Google Cloud Platform.)
Our view: The story for internet stocks in ’23 is a stand-off between ongoing post-COVID indigestion & an actively softening consumer vs. a sea of already lowered expectations.
2022 Recap. 2022 was a relative disaster by almost any measure with the sectors’ FY performance & valuation falling 56% & 53%, respectively.
The confluence of many COVID beneficiaries having ‘comped the comp’ (strong earnings vs. 2020) in ’21 alongside the war, rising interest rates and broad-based inflationary pressures brought investor expectations even further back to earth.
Guide downs were punished on views that number cuts had only just begun while better-than-feared results/guidance struggled to see follow-through on views that headwinds were simply not yet visible.
So what are the attributes for getting positive?
1) Idiosyncratic drivers/stories: META, WIX,
2) Attractive second half setups: AMZN, GOOGL,
3) Washed out estimates/sentiment: META, MTCH, SNAP, FVRR,
4) Acceleration stories: META, MTCH, GOOGL, FVRR,
5) Product cycle/pricing stories: META, WIX, SQSP, MTCH, BMBL,
6) Bottom-line upside potential: DASH, UBER, SQSP, SNAP, BMBL, ABNB, FVRR,
Favorite ideas: 1) META: Getting its targeting/measurement mojo back + abating Tiktok concerns = multiple expansion alongside bottom-line support.
2) WIX: Upgrading to Outperform from Sector Perform: Solid defensive play benefiting from structurally higher new business formation vs. pre-COVID with durable pricing power & under-appreciated long-term free cash flow story.
Attractive second half setups: 3) AMZN: ’23’s a harvest year for retail but cloud expectations likely still need to come down.
4) GOOGL: Identifier for advertisers (IDFA) reversion + slower ad market or guidance could remain a slow bleed starting out the year.
Key themes & questions: While we articulate 30 key themes across the space in the report, we highlight four of the more important ones as determinants for stock selection & performance:
1) Can internet companies fully lap COVID in ’23 in the eyes of investors and get priced like secular growers again,
2) how does demand hold up in several key discretionary categories which has proven more resilient to date (food delivery, travel, live events as examples)?
3) The artificial intelligence (AI) capital expenditure arms race going nuclear building incremental structural advantages.
4) Which hyper-scalers emerge strongest from the apparent, accelerated optimization?
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