The 2022 Internet Playbook from Jefferies is looking for a big reversal for its picks in 2022 - after the firm's coverage ended 2021 with its worst underperformance vs. the S&P 500 in the past 20 years.
The stocks covered fell 5% last year, even as the broader market gained 27%, a big gap that presents a "great opportunity" for a bounceback this year.
"There were a number of disruptions that impacted the Internet sector in 2021, including AAPL's iOS 14.5 privacy changes (digital advertising), low housing inventory (online real estate), and COVID-19 disruptions (travel, ride-share, online dating) that all impacted company fundamentals," the firm says.
Some things (like higher labor costs for Amazon.com (NASDAQ:AMZN)) are going to persist in the new year, but the firm says valuation multiples for the coverage are about 33% below where they were a year ago.
First and foremost among its large-cap picks, though, is Meta Platforms (NASDAQ:FB). It's "one of the best fundamental stories in online advertising, producing consistent best-in-class ROI for marketers," Jefferies says. Some well-known near-term headwinds are worth watching: the iOS 14.5 privacy changes, competition for youth from TikTok (BDNCE) and Snap (NYSE:SNAP), and much heavier investments driving margin compression. But there's also monetization potential in Instagram Reels, Shops, and Messaging ahead, and a current multiple at about 20x 2023 EPS is "compelling."
It's hard to discuss Meta Platforms without talking about the metaverse investment opportunity. And the early success of the Quest 2 stand-alone headset is proof that Meta can be a leader there, the firm says. "Oculus rose to the No. 1 most downloaded app in the App Store on Christmas Day, providing a clear indication that VR adoption is more mainstream than previously thought," the firm says.
Quest 2 is likely a "critical on-ramp" for bringing in young users, and its mainstream success is a potential catalyst for more developers to work more closely with Meta on games and apps.
While Meta is well positioned for the virtual reality aspects of the metaverse, the potential for augmented reality (AR) can be realized by Snap (SNAP), Jefferies says. Snap's AR "Lenses" will be a key driver for user growth, as AR usage becomes more mainstream, and the firm expects more brand partnerships as AR adoption grows faster than the overall user base.
Snap (SNAP) may even accelerate revenue growth back toward its long-term goal of sustainable 50%-plus growth in Q4. There's "ample runway to improve monetization," with Snap's North American average revenue per user around $30 (vs. $64 for Twitter, and $274 for Meta). And there's multibillion-dollar revenue potential in high-engagement areas like the Map and Spotlight as well.
Alphabet (GOOG, GOOGL) deserves a mention. Fundamentals remain strong at the company, the firm notes: Digital ad demand is healthy at search and at YouTube; the company's cloud business is still outgrowing bigger competitors; and operating margins are "healthy and expanding." But after a 65% gain in 2021, comparisons are looking extra tough this year in revenue (fiscal '21 estimates call for 39% growth, triple fiscal 2020's 13%) and in operating margins (modeled 900-basis point expansion to about 37% in fiscal 2021).
Still, with an attractive valuation, Alphabet is still continuing a climb toward a $3,500 price target (implying 28% upside), Jefferies says.
Turning to online dating, 2022 may be the year that "love makes a comeback"; after a valuation pullback, Jefferies says Match Group (NASDAQ:MTCH) is headed for 25%-plus returns. The near term looks tricky with a COVID-19 surge, but there are "numerous drivers for the stock over the next 12 months": Savings from the Apple Epic ruling should drive positive EBITDA revisions; Tinder's product updates should drive that unit's revenues back toward mid-20% growth; the Hyperconnect tech integration is a multi-year tailwind that will start to be realized in the second half; and Hinge is just 10% of revenue, but under-monetized.
When it comes to ad technology, investors need to get into the PIIT - PubMatic (NASDAQ:PUBM), Integral Ad Science (NASDAQ:IAS), ironSource (NYSE:IS), and The Trade Desk (NASDAQ:TTD), Jefferies says. Privacy changes Apple made to iOS 14 will "continue to weigh on Walled Gardens more heavily than the Open Internet," thanks in large part to greater omnichannel exposure (in the case of The Trade Desk and PubMatic) and/or limited use of behavioral ad targeting (for example, IAS and ironSource).
Valuations aren't demanding in the group either, with PubMatic and IAS below historical averages, and The Trade Desk 30% off its November highs and 40% below all-time highs. As for ironSource, it's the firm's top pick among small- and mid-cap stocks - a "key partner for mobile app developers (84% of large custs are gaming) offering mission critical services for user acquisition, in-app monetization, publishing, and analytics." Jefferies says ironSource is well positioned to grow revenues at a three-year compound rate of more than 30% with industry-leading margins; a $14 price target points to potential to double, with 103% upside.
Along with the playbook mention, Jefferies upgraded The Trade Desk (TTD) to Buy and made it a top pick among large-cap Internet names, saying it's the best pure-play approach to the shift toward programmatic advertising.