Bullish on Facebook, eBay, Priceline, Pandora

JP Morgan analyst sees sizable gains for Pandora, Priceline shares

If you're like a lot of people, you feel kind of burned by Internet stocks. But then again, you're wondering whether they've taken a beating enough that it's finally time to jump in.

At least one analyst thinks so. 

J.P. Morgan analyst Doug Anmuth has released his list of the top Internet stock picks for the coming year, and they are an eclecic bunch: Facebook, eBay, Priceline, and Pandora.

While Anmuth sees a bump up in prices for Facebook and eBay, he's really bullish on Priceline and Pandora. For instance, Anmuth has a price target of $35 on Facebook, 11% above where the stock trades today, but his price target on Pandora is $14, 28% above Pandora's shares today.  

"We remain positive on the Internet sector in 2013 as we expect continued strong top-line growth driven by secular tailwinds in eCommerce and Online Travel, and improving monetization of mobile advertising," Anmuth wrote. 

"In  2013—the second year of real mobile Internet impact in our  view—we  think stock performance will be more company-specific and impacts of the desktop slowdown will come more into focus. We also expect mobile advertising to begin to capture a meaningful share of ad dollars and that is reflected in our top large-cap pick Facebook and top small-cap pick Pandora."

Let's go through each of these four stocks, and see why Anmuth thinks they will do well in the coming year.

Facebook

Anmuth gives Facebook a price target of $35, based on projected ad revenue and mobile trajectory.

Facebook had strong ad revenue growth in the third quarter of 2012, based on its advertisements on mobile News Feeds. The company's total revenue for the year was $1.26 billion, of which $1.09 billion, or 86% of total revenue, came from advertising. It increased 36% from the same quarter in 2011. 

Anmuth says that he is positive that the company will be able to continue monetizing from mobile going forward, with ad formats including Sponsored Stories, Promoted Posts, App-Install Ads, and others, driving even greater revenue.

"We project mobile ad revenue of $2.37B in 2013—growth of 332% in the first full year of mobile—representing 39% of total advertising. For 2014 we project $4.0B of mobile advertising, up 71% Y/Y and accounting for 53% of total advertising, surpassing desktop," wrote Anmuth.

In addition to mobile growth, Anmuth also says that the company has room to grow on desktop as well.

Of course, he notes that Facebook could overdo it, and push to hard to monetize newsfeeds. It might also take some time before marketers really understand how to successfully make money from mobile and desktop could see a sharp fall in the next year.

So, Anmuth says, look for Facebook Exchange, which allows marketers to use real-time customer data to reach a larger audience on the social network, to gain greater penetration, and if Gifts, its e-commerce wing that launched in September, can become a major source of revenue.

So far, 2013 is looking good for Facebook. Its stock recently went above $30 for the first time since July, and it is up another 0.89% on Friday, trading at $31.58 a share.

eBay

Anmuth gives eBay a 2013 price target of $56, due to accelerated gross merchandise volume, or the total volume in dollars of sales on eBay and eBay-branded trading websites in a given economic period.

"We look for overall FX-neutral exvehicles GMV to accelerate to 16% growth in 4Q—17% in the U.S.—with potential to grow faster in the first half of 2013," Anmuth wrote.

When it comes to payments, Anmuth expects them to remain stable, and says that mobile will be a big driver of growth in the coming year. Downloads of the eBay app are over 100 million, and the app adds 2.4 million listings every week. 

"On the Marketplace side, eBay has been innovative with mobile apps, creating a seamless buying and selling experience that we believe has reinvigorated the business and also attracted a younger demographic," he wrote.

There is still the possibility that Merchant Services could deteriorate, Anmuth notes, and he says that PayPal point of sale needs to better incentivise users with targeted offers.

EBay's stick is currently up 0.95% on Friday, trading at $53.51 a share.

Priceline

Anmuth gives Priceline a price target of $740 for the year, based on growth from Booking.com, Agoda, and Rentalcars.com.

"We currently project 2013 FX-neutral bookings growth of 22% and International FX-neutral bookings growth of 26%, though both are likely conservative as Priceline pushes harder on growth at some expense to margins and benefits from a somewhat more stable European macro environment," Anmuth says.  

In the third quarter of 2013, Priceline saw hotel room growth go up by 36%, and Booking.com had over 260,000 hotels as of the beginning of this year. Anmuth sees the potential for growth in Europe, given that Booking.com has only a 10% share of European hotels. There are also opportunities for growth in Latin America and the Asian-Pacific region, since Europe is 80% of Priceline's business.

Priceline's purchase of Kayak is set to close at the end of this quarter, and Anmuth sees the potential for international expanstion

"Kayak’s booking path now accounts for 11% of the company’s total revenue and Kayak has 39% share of clicks in the hotel bookings path. We think Priceline can help increase those metrics and drive more bookings to Priceline Group brands," Anmuth wrote.

Priceline's biggest impediment to success could be Expedia, whose bookings growth in the third quarter of 2012 was 27%. 

"Priceline continues to gain overall share, but not as much as it was before, even if Expedia’s gains are coming more at the expense of 2nd and 3rd tier travel players. We continue to think Expedia’s growth rate will be an important metric for Priceline shares in 2013."

Priceline stock is up 0.23% Friday, trading at $655.13 a share.

Pandora

Anmuth gives Pandora a price target of $14, based on the platform's usage growth.

Pandora has over 175 million users, 67 million of which are active, and total quarterly hours nearing 4 billion. And yet it was still able to grow more than 50% year-to-year. Anmuth expects growth in hours to slow to 32% in 2014, but Pandora's share of total U.S. radio listening will increase.

To Anmuth this means that Pandora's growth has remained strong despite other similar services, including Spotify and iHeartRadio, shoehorning in on its territory. This also means that advertisers will not be able to act like Pandora does not exist going forward.

If there is one thing standing in Pandora's way it is Apple. 

It  was reported in September that that Apple was in negotiations with music labels to create an Internet radio service, much like Pandora, though it was said that it would take months for Apple to have everything in place to launch such a service. That planned service could be launching within the next few months.

Anmuth says that he thinks Pandora is cautious due to the risk of competition from Apple, but he also believes that Pandora has the advantage, given that an Apple radio station would be limited to Apple devices, cutting it off from half of the smartphone market. 

"While it remains difficult to know to what degree Apple will support and promote an Internet radio product, we point out that there have been multiple services within iTunes that have had limited traction, such as Ping and Genius."

Pandora's stock is up 0.44% Friday, trading at $10.91 a share.

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