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Internet/e-Commerce
1Q Internet Sector Preview
Earnings Preview Equity | 06 April 2017
Unauthorized redistribution of this report is prohibited. This report is intended for amanda.ens@baml.com
1Q Preview; Expectations building on a strong 2H
Our early sector preview highlights our estimates vs. Street, early 1Q data points, and
some opportunities for 1Q results for 30 stocks in our coverage group (more detailed
company previews to follow). For large-caps, Street 2017 EPS estimates are down 8%
YTD while the average stock price is up 9% YTD; suggesting macro and 2H optimism is
driving stocks, which could continue throughout earnings season. 1Q was not without
potential pressures, including ramping competition in several sectors and delayed tax
refunds. A key theme for the group, in our view, is advertising & listing ranking revenue
initiatives at eCommerce sites (AMZN, EBAY, EXPE), and we are constructive on all three
stocks. Per our Internet sentiment ranking screen (page 7), FB, WIX, TREE have best
sentiment while TWTR and TRIP have weakest.
A few early checks positive, mixed eCommerce data
Our early ad checks suggest robust overall demand, aided by somewhat easy comps vs
1Q’16, with Instagram momentum a standout. eCommerce is more mixed, with some
concerns on consumer spending due to delayed tax refunds, but optimism that spending
will rebound in March/April. In travel, there are modest concerns on pressure on US
inbound travel, a bigger negative for Expedia than Priceline. FX spot rates for both the
Euro and the Pound have depreciated 1% vs. the US$ since end of Jan.
Many key upcoming events for stocks in 2Q
Top events in 2Q include Facebook’s F8 developer conference on April 18-19, Google’s
Marketing Next keynote on 5/23, an AWS event in San Francisco on April 18-19,
expected closing Verizon’s acquisition of Yahoo, Netflix’s release of several key
franchise including House of Cards, Orange is the New Black, Sense8, Glow, and
Unbreakable Kimmy Schmidt, consumer wide release of Pandora Premium, Expedia’s
new HomeAway disclosures and, possibly, Amazon’s new revenue disclosures.
We expect meet/beat EPS for several companies
We are above the Street on 2017 EPS for 16 of the 25 stocks discussed within and, of those,
we are most confident in Facebook & Priceline for 1Q upside potential. We expect Facebook
to benefit from robust traffic, Instagram momentum, and greater adoption of audience
targeting tools. We also think Priceline can beat 1Q given strong booking trends into the
quarter and a modest recovery in European travel. We are below the Street on 2017 EPS for
AMZN, TRIP, and YHOO. Expedia is a top eComm/travel idea for 2Q/3Q on potential for
accelerating room nights, HomeAway optimism, and less uncertainty on near-term estimates.
GOOG, AMZN & ZG interesting 1Q sentiment stocks
For large cap’s, we believe GOOGL has had high recent interest given controversy
around Youtube ad placements. We are not sure if Google will provide clarity on the
issue on their call, but we do expect advertisers to return by 3Q and any overhang to be
resolved. For Amazon, the company had new revenue disclosures in its 10-K filing, and
there is growing optimism on advertising being a positive bottom-line driver. In SMID
Internet, Zillow has more controversy going into 1Q as investors are once more
concerned about potential regulation by the CFPB limiting the ability of agents and
mortgage brokers to co-market on the platform. We remain positive on the stock due to
its dominant position in online real estate and our belief that the high ROI of the ad unit
(our survey suggested >6x return) will ensure that agents buy Zillow placements
regardless of mortgage broker incentives. Additionally, we see earnings upside potential.
BofA Merrill Lynch does and seeks to do business with issuers covered in its research reports. As a
result, investors should be aware that the firm may have a conflict of interest that could affect the
objectivity of this report. Investors should consider this report as only a single factor in making
their investment decision.
Refer to important disclosures on page 62 to 64. Analyst Certification on page 59. Price Objective
Basis/Risk on page 53. 11729935
Timestamp: 06 April 2017 04:12AM EDT
Americas
Internet/e-Commerce
Justin Post
Research Analyst
MLPF&S
+1 415 676 3547
justin.post@baml.com
Nat Schindler
Research Analyst
MLPF&S
+1 415 676 3574
nathaniel.schindler@baml.com
Ryan Goodman, CFA
Research Analyst
MLPF&S
+1 415 676 3560
ryan.c.goodman@baml.com
Jason Mitchell
Research Analyst
MLPF&S
+1 415 676 3534
jason.s.mitchell@baml.com
Akshay Bhatia
Research Analyst
MLPF&S
+1 415 676 3548
akshay.bhatia@baml.com
Table 1: Key 1Q metrics for Large Cap Internet (>$5bn Market Cap)
Company Ticker Key 1Q Metric BofAML Estimate
Alphabet GOOGL Website revenue (ex-FX) growth vs 22.3% in 4Q 21.6%
Amazon AMZN AWS revenue growth vs. 47% in 4Q 43% y/y
eBay EBAY US GMV growth trends 3.5% y/y
Expedia EXPE Room night growth vs. 15% in 4Q 16%
Facebook FB Ad revenue growth (ex-FX) vs. 54% reported in 4Q 52%
Netflix NFLX 1Q Intl sub guidance 3.9mn
Priceline PCLN 1Q room night growth vs. 31% in $Q 26% y/y
Snap SNAP Global DAU's vs. 158mn in 4Q 166mn
TripAdvisor TRIP Update on ad spend targets, 2017 guidance 18% S&M y/y growth
Twitter TWTR MAUs and y/y trend vs 319mn (+4% y/y) in 4Q 322mn MAUs (+4% y/y)
Yahoo YHOO Any update on acquisition timing and ongoing breach investigations N/A
Zillow ZG Mortgage Revenue $18.1mn
Source: BofA Merrill Lynch Global Research estimates
Table 2: Key 1Q metrics for Small Cap Internet (<$5bn Market Cap)
Company Ticker Key 1Q Metric BofAML Estimate
BankRate RATE 1Q revenue $117mn
Quotient QUOT 1Q transactions 731mn
Care.com CRCM US paying families 266,607 (4% y/y)
Fitbit FIT 1Q unit sales and gross margin 3mn/39%
GoPro GPRO 1Q unit sales and gross margin 800K/35%
GrubHub GRUB Gross food sales growth 26%
Match.com MTCH Paid Member Growth 17%
OnDeck Capital ONDK 1Q origination growth and marketplace take rate 12% / 3%
Pandora P Ad revenue per listening hour growth 10%
LendingTree TREE Variable marketing margin growth 29% y/y
Trivago TRVG Qualified referral growth 56% y/y
Wayfair W 2Q revenue growth guidance 25% y/y
Wix WIX Premium subscribers growth 36%
Yelp YELP 1Q Local advertising account adds 4k (17% y/y)
Zynga ZNGA Online Games DAUs 17.9
Source: BofA Merrill Lynch Global Research estimates
2 Internet/e-Commerce | 06 April 2017
1Q Internet Summary Previews
We are publishing updates on 1Q industry data points and write ups on our early outlook
and top 1Q earnings focus items for select stocks in our Internet coverage group (more
detailed previews with various channel checks for large cap stocks to follow.) Our
commentary is designed to highlight 1Q data points, stock trading opportunities and
potential issues for 1Q results, and our estimates vs. consensus.
For 1Q EPS estimates, we are above the street for well over 50% of our companies
under coverage, and only below on QUOT, P, RATE, and TRIP. For large caps, we have
highest confidence in EPS upside for Facebook and Priceline.
Table 3: 1Q17 BofAML Estimates vs. The Street
Large Cap Stocks (>$5bn Market Cap)
Ticker 1Q17 Metric BofA ML Street
Small Cap Stocks (<$5bn Market Cap)
BofA ML vs.
Street Ticker 1Q17 Metric BofA ML Street
BofA ML vs.
Street
AMZN Revenue $35,335 $35,255 RATE Revenue $117 $116
EPS $2.34 $2.28 Ahead EPS $0.14 $0.15 Below
EBAY Revenue $2,210 $2,206 CRCM Revenue $43 $43
EPS $0.49 $0.48 Ahead EPS $0.04 $0.02 Ahead
EXPE Revenue $2,134 $2,140 FIT Revenue $282 $278
EPS $0.07 $0.06 Ahead EPS ($0.19) ($0.19) In-line
FB Revenue $7,905 $7,798 GRUB Revenue $153 $153
EPS $1.14 $1.11 Ahead EPS $0.25 $0.24 Ahead
GOOGL Revenue $20,219 $19,891 GPRO Revenue $205 $207
EPS $9.53 $9.45 Ahead EPS ($0.39) ($0.44) Ahead
NFLX Revenue $2,710 $2,644 TREE Revenue $127 $125
EPS $0.45 $0.45 In-line EPS $0.93 $0.91 Ahead
PCLN Revenue $2,415 $2,441 MTCH Revenue $293 $308
EPS $9.08 $8.75 Ahead EPS $0.14 $0.13 Ahead
SNAP Revenue $163 $158 QUOT Revenue $72 $72
EPS ($0.18) ($0.21) Ahead EPS $0.01 $0.03 Below
TRIP Revenue $379 $377 P Revenue $319 $318
EPS $0.23 $0.27 Below EPS ($0.49) ($0.35) Below
TWTR Revenue $535 $510 TRVG Revenue €241 €241
EPS $0.03 $0.01 Ahead EPS €0.02 €0.02 In-line
YHOO Revenue $821 $815 WIX Revenue $91 $90
EPS $0.14 $0.14 In-line EPS ($0.05) ($0.13) Ahead
ZG Revenue $239 $236 W Revenue $944 $933
EPS $0.06 $0.05 Ahead EPS ($0.49) ($0.60) Ahead
YELP Revenue $201 $198
EPS $0.18 $0.16 Ahead
Source: BofA Merrill Lynch Global Research, Bloomberg, as of 4/4/2017
Internet/e-Commerce | 06 April 2017 3
Our 2017 estimates vs. street
Of the 25 Internet stocks listed below in our coverage, we are above the Street on 2017
EPS on 16 stocks and below the street on 9.
Table 4: 2017 BAML Estimates vs. The Street
Large Cap Stocks (>$5bn Market Cap)
Ticker Metric BofA ML Street
Small Cap Stocks (<$5bn Market Cap)
BofA ML vs.
Street Ticker Metric BofA ML Street
BofA ML vs.
Street
AMZN Revenue $164,532 $165,158 RATE Revenue $508 $505
EBITDA $18,246 $19,382 EBITDA $126 $126
EPS $10.90 $12.60 Below EPS $0.68 $0.70 Below
EBAY Revenue $9,458 $9,398 CRCM Revenue $172 $172
EBITDA $3,520 $3,494 EBITDA $20 $19
EPS $2.03 $2.01 Ahead EPS $0.43 $0.36 Ahead
EXPE Revenue $10,097 $10,010 FIT Revenue $1,625 $1,580
EBITDA $1,857 $1,835 EBITDA ($156) ($120)
EPS $5.54 $5.38 Ahead EPS ($0.37) ($0.36) Below
FB Revenue $38,546 $37,774 GRUB Revenue $650 $645
EBITDA $24,358 $23,775 EBITDA $184 $181
EPS $5.67 $5.43 Ahead EPS $1.13 $1.10 Ahead
GOOGL Revenue $88,636 $87,691 GPRO Revenue $1,307 $1,266
EBITDA $43,457 $43,264 EBITDA $66 $48
EPS $41.82 $41.12 Ahead EPS $0.09 ($0.08) Ahead
NFLX Revenue $11,627 $11,221 TREE Revenue $525 $515
EBITDA $1,218 $1,053 EBITDA $96 $96
EPS $1.44 $1.41 Ahead EPS $3.91 $4.00 Below
PCLN Revenue $12,518 $12,447 MTCH Revenue $1,285 $1,325
EBITDA $4,784 $4,747 EBITDA $462 $459
EPS $75.35 $74.11 Ahead EPS $0.95 $0.88 Ahead
SNAP Revenue $1,007 $1,034 QUOT Revenue $312 $288
EBITDA ($580) ($617) EBITDA $44 $46
EPS ($0.59) ($0.57) Ahead EPS $0.18 $0.09 Ahead
TRIP Revenue $1,647 $1,649 P Revenue $1,629 $1,621
EBITDA $346 $339 EBITDA ($17) ($38)
EPS $1.22 $1.23 Below EPS ($0.21) ($0.49) Ahead
TWTR Revenue $2,301 $2,352 TRVG Revenue €1,105 €1,088
EBITDA $639 $564 EBITDA €44 €40
EPS $0.33 $0.27 Ahead EPS €0.05 €0.06 Below
YHOO Revenue $3,369 $3,574 WIX Revenue $420 $416
EBITDA $848 $891 EBITDA $74 $64
EPS $0.65 $0.67 Below EPS $0.31 $0.36 Below
ZG Revenue $1,062 $1,048 W Revenue $4,169 $4,237
EBITDA $215 $211 EBITDA ($48) ($59)
EPS $0.48 $0.44 Ahead EPS ($1.55) ($1.65) Ahead
YELP Revenue $895 $889
EBITDA $166 $161
EPS $0.99 $1.04 Below
Source: BofA Merrill Lynch Global Research, Bloomberg, as of 4/4/2017
4 Internet/e-Commerce | 06 April 2017
Stock price performance above estimate revisions
Internet sector stocks are up 6% YTD, on average, while EPS estimates for profitable
companies in our coverage cluster are down 5% YTD. For large-caps over $5bn in
market cap., street 2017 EPS estimates are down 8% YTD while the average stock price
is up 9% YTD; suggesting macro expectations and stock rotation are having a larger
impact on stock movement than earnings estimates. eCommerce leads the group, up
8% YTD with Travel up 6% and Media behind at 5%. Small Caps are lagging Large caps
YTD at 4% vs. 9%.
Chart 1: YTD Stock Price Performance vs. YTD 2017 Estimate Revisions By Sector
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
Internet
Group
Media eCommerce Travel Large-Cap Small-Cap SP 500
2017 % Change in Stock Price YTD % Change in Street 2017 Est
Source: Excludes companies with negative earnings, Bloomberg, as of 4/4/2017
Nine of the twelve large caps in our group are up YTD and four of these companies have
had positive stock returns despite negative EPS estimate revision (AMZN, EXPE, EBAY &
IAC). TRIP is the worst performing large cap YTD, down 12%. Only FB and NFLX have
had positive 2017 EPS estimate revisions, with GOOGL, YHOO and PCLN holding flat.
Chart 2: YTD Stock Price Performance vs. YTD 2017 EPS Revisions For Larger-Cap Internet Stocks ($5bn+)
30%
20%
10%
0%
-10%
-20%
-30%
-40%
AMZN EBAY EXPE FB GOOGL NFLX PCLN TRIP TWTR YHOO IAC ZG SPX Avg
2017 % Change in Stock Price YTD % Change in Street 2017 Est
Source: Bloomberg consensus estimates, as of 4/4/2017
Internet/e-Commerce | 06 April 2017 5
Sector Valuations
Internet sector trading multiples for EV/EBITDA and P/E are tracking up slightly YTD,
(excluding NFLX). On a y/y basis, the group P/E is at 24x vs. 22x last year, while the
group EV/EBITDA is at 14x vs. 13x a year ago.
Chart 3: Internet Sector Historical 2-Yr Forward Avg. EV/EBITDA
25x
20x
15x
10x
5x
0x
Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
Source: BofA Merrill Lynch Global Research, Bloomberg, as of 4/4/2017
Chart 4: Internet Sector Historical 2-Yr Forward Avg. P/E
40x
35x
30x
25x
20x
15x
10x
5x
0x
Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
Source: BofA Merrill Lynch Global Research, Bloomberg, as of 4/4/2017
Large cap receiving a premium; Small caps at the low-end of historical range
Excluding NFLX and YHOO, large cap stocks in the Internet group are trading at 26x
2018 EPS below the small cap group at 28x 2018 EPS, with both Large and Small caps
trading slightly above their average for the past 5 years (see chart below). The media
sector is trading at a steep discount to travel and eCommerce.
• The eCommerce sector is currently trading slightly above the midpoint of its
five year range at 32x 2018 EPS. AMZN and WIX are well above at 49.5x and
74x respectively while EBAY is trading below at 15x.
• The Media sector is trading well below the midpoint of its recent range
(excluding NFLX), at 25x 2018 EPS. GOOG (18x), FB (21x), and YELP (23x) are
below the sector average while TWTR (40x) is above.
• The Online Travel sector is currently trading slightly above the mid-point of its
five year range at 23x but below the internet sector average. TRIP (29x) is
trading above the average while EXPE (18x) and PCLN (21x) are below.
Chart 5: Historical 2-Year Forward P/E Multiple By Sector (ex NFLX)
70x
60x
50x
40x
30x
20x
10x
0x
Chart 6: Historical 2-Year Forward P/E Multiple (select stocks)
90.0x
80.0x
70.0x
60.0x
50.0x
40.0x
30.0x
20.0x
10.0x
0.0x
Source: BofA Merrill Lynch Global Research, Bloomberg, as of 4/4/2017
Source: BofA Merrill Lynch Global Research, Bloomberg, as of 4/4/2017
6 Internet/e-Commerce | 06 April 2017
Currency still a slight headwind for 1Q results but improving
We expect FX to remain a y/y headwind for 1Q results; the Euro is down about 6% y/y
but up 1% from where it was when most Large-cap internet companies reported 4Q
results in late January (~$1.06). The GBP at $1.22 is down slightly (1.4%) over the same
period. Our currency strategist is forecasting the Euro to end 2017 at $1.05 and the
GBP to end at $1.19. FX pressure will ease after 1Q if rates hold, unless a company has
high exposure to Japan.
Table 5: Percent change y/y
Euro GBP Yen Other*
4Q15
1Q16
-12.3%
-2.0%
-4.5%
-5.4%
-8.1%
1.1%
-14.4%
-11.0%
2Q16 2.0% -4.9% 9.4% -6.3%
3Q16
4Q16
0.3%
-1.5%
-13.9%
-17.4%
19.3%
15.1%
-2.9%
0.0%
1Q17 -3.5% -14.5% 2.5% 3.3%
2Q17E
3Q17E
-5.6%
-4.5%
-15.4%
-9.2%
-3.9%
-9.9%
-0.3%
-0.9%
4Q17E -1.2% -3.5% -8.1% 0.2%
Source: BofA Merrill Lynch Global Research, Bloomberg, as of 4/4/2017
International revenues a percent of total revenues is highest at PCLN (87% of gross
profit), GOOG (53%), FB (53%), TRIP (43%), EBAY (57%), and EXPE (42%). Higher
operating margins in UK/Europe than US and lower Intl. taxes can increase this
exposure.
Chart 7: Spot Rate % Change Y/Y (USD vs. FX Spot Rate)
30%
20%
10%
0%
-10%
-20%
-30%
Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16Dec-16 Jan-17 Feb-17Mar-17
Euro GBP Yen Other
Source: Bloomberg; Other Includes the following *Asian (KRW, AUD, HKD), Europe (RUB, SEK, CHF), Americas (BRL, MXN, CAD) , as of
4/4/2017
Internet/e-Commerce | 06 April 2017 7
Sentiment Ranking Update
We are updating our sentiment ranking index on 25 stocks in our Internet coverage
universe (as of 4/4/17). We have aggregated six different indicators we think are
relevant to gauge sentiment and have generated an overall “sentiment” score for each
company. This sentiment analysis is intended to be informative and should not be used
to form an investment opinion; for example our model does not factor in valuation or
management quality. Of our company coverage universe, we have excluded four game
publisher companies as well as two recent IPO’s from this analysis as data may not be
comparable.
Table 6: 1Q16 change in sentiment ranking
Ticker Rank Pre 4Q Δ Score Pre4Q Δ
FB 1 +3 4 +4
WIX 2 -1 4 +2
TREE 3 -1 8 -1
AMZN 4 +5 8 +4
NFLX 5 -2 9 -1
GOOGL 6 NA 9 +1
PCLN 7 +1 9 +2
CRCM 8 +9 11 +3
EXPE 9 +5 12 +2
IAC 10 +5 12 +2
RATE 11 -4 13 -2
EBAY 12 +4 13 +1
ONDK 13 +5 14 +1
ZG 14 -9 14 -5
YHOO 15 +6 14 +3
GPRO 16 +8 14 +5
YELP 17 -7 16 -4
W 18 -5 16 -3
P 19 NA 16 NA
GRUB 20 -9 16 -4
MTCH 21 +1 17 +1
QUOT 22 -10 17 -4
FIT 23 +2 19 +1
TRIP 24 -1 20 -2
TWTR 25 -5 21 -5
Source: BofA Merrill Lynch Global Research, Bloomberg, as of 4/4/2017
Investor sentiment categories
We assembled data that measures investor sentiment across six categories. These
metrics include latest short interest (as a % of float), change in short interest as a % of
float over the last 90 days, current stock performance over the last 90 days, current
average sell side ratings, forward year EPS estimate revisions over last 90 days, and
expected FY17 revenue growth. While there are no perfect indicators of average
investor sentiment, we believe these metrics provide a helpful framework of investor
sentiment in our sector. In our analysis, Facebook, WIX, and LendingTree had the highest
sentiment in 1Q, while Fitbit, Trip and Twitter had the lowest sentiment. Care.com had
the most improved ranking, moving up 9 points to 8 th , while Quotient had the biggest
decline moving down 10 spots in our ranking to 22 nd .
Methodology
Our methodology consisted of: 1) gathering financial data across six categories that we
believe are relevant to measuring investor sentiment, 2) ranking companies on each
attribute using a scale of 1 to 29, with 1 highest and 29 the lowest, and 3) ranking the
companies based on the avg. score of the six metrics.
8 Internet/e-Commerce | 06 April 2017
Highest sentiment: FB, WIX, and TREE; Lowest: FIT, TRIP, and TWTR
Based on our sentiment ranking index, Facebook, Wix, and LendingTree have top
investor sentiment pre 1Q earnings. Facebook moved into first place from fourth due to
the lowest short interest as % of float, second highest FY17 revenue growth, sixth
highest sell side FY16 EPS estimate revisions, and third best stock performance in the
last 90 days. Wix came in second place with top stock performance in the last 90 days,
top expected FY17 revenue growth and second best sell-side FY16 EPS estimate
revision, despite ranking ninth for current sell side ranking and seventh for short interest
ratio. LendingTree placed third with best current sell side ranking and best change in
short interest ratio.
Fitbit had third worst investor sentiment with the worst stock performance in the last
90 days, the worst expected FY17 revenue growth and the second largest change in
short interest in the period. TripAdvisor, had the second lowest sentiment with the third
worst sell side ranking and fifth worst sell side EPS estimate revision. Twitter, our
lowest sentiment stock pre 1Q earnings, had second to worst sell side ranking and
expected FY17 revenue growth, along with third to worst sell side estimate revisions
and was below average in all of our categories.
Score Ranking vs. Investment Rating
Our sentiment analysis is independent of our investment rating system, and our
investment rating may or may not factor in positive or negative sentiment. This
scorecard analysis includes only data currently up to the last 90 days, and our
investment rating opinion takes into consideration potential stock price fluctuations,
attractiveness for investment relative to other stocks within our Coverage Cluster,
business model quality, and valuation. Please see our Fundamental Equity Rating
Opinion Key at the end of the report for more details.
Table 7: Combined Metric List
Company
Short Interest %
float
Δ short
interest % of
float
Performance
90 days
Sell Side
Ranking
EPS
Estimate
Revisions
Expected
FY17 Rev.
Growth
FB 1% 0% 21% 4.7 4% 37%
WIX 2% -1% 67% 4.4 62% 43%
TREE 23% -20% 21% 5.0 -6% 34%
AMZN 1% 0% 20% 4.8 -10% 21%
NFLX 6% -1% 14% 4.1 15% 27%
GOOGL 1% 0% 6% 4.7 0% 19%
PCLN 3% 0% 20% 4.6 0% 16%
CRCM 3% 0% 42% 3.5 28% 6%
EXPE 8% -2% 11% 4.6 -12% 14%
IAC 1% 0% 12% 4.4 -5% -1%
RATE 2% 0% -13% 4.2 2% 16%
EBAY 2% 0% 14% 3.6 -3% 5%
ONDK 12% 3% 1% 3.3 34% 30%
ZG 11% -2% -9% 3.9 -26% 24%
YHOO 6% 1% 19% 3.8 0% 2%
GPRO 36% -3% -4% 2.3 74% 7%
YELP 10% 0% -14% 3.7 -2% 25%
W 38% 2% 17% 3.9 -22% 25%
P 30% 2% -7% 3.9 2% 17%
GRUB 18% 7% -11% 4.1 -5% 31%
MTCH 27% 5% -4% 4.2 1% 8%
QUOT 8% 0% -13% 4.8 -56% 5%
FIT 26% -4% -29% 3.1 NA -27%
TRIP 16% 5% -12% 2.9 -21% 11%
TWTR 11% 3% -11% 2.5 -55% -7%
Source: BofA Merrill Lynch Global Research, Bloomberg, as of 4/4/2017
Internet/e-Commerce | 06 April 2017 9
Table 8: Combined metric rankings
Company
Short
Interest %
float
Δ short
interest %
of float
Performance
90 days
Sell Side
Ranking
EPS
Estimate
Revisions
Expected
FY17 Rev.
Growth
Average
FB 1 8 3 4 6 2 4
WIX 7 6 1 9 2 1 4
TREE 20 1 4 1 17 3 8
AMZN 4 9 5 2 18 10 8
NFLX 10 7 10 13 5 6 9
GOOGL 2 12 13 5 12 11 9
PCLN 8 11 6 7 10 14 9
CRCM 9 14 2 20 4 19 11
EXPE 12 5 12 6 19 15 12
IAC 3 10 11 8 16 23 12
RATE 6 15 23 10 8 13 13
EBAY 5 13 9 19 14 20 13
ONDK 17 21 14 21 3 5 14
ZG 15 4 18 14 22 9 14
YHOO 11 18 7 17 11 22 14
GPRO 24 3 15 25 1 18 14
YELP 14 16 24 18 13 8 16
W 25 19 8 15 21 7 16
P 23 20 17 16 7 12 16
GRUB 19 25 20 12 15 4 16
MTCH 22 24 16 11 9 17 17
QUOT 13 17 22 3 24 21 17
FIT 21 2 25 22 N/A 25 19
TRIP 18 23 21 23 20 16 20
TWTR 16 22 19 24 23 24 21
Source: BofA Merrill Lynch Global Research, Bloomberg, as of 4/4/2017
10 Internet/e-Commerce | 06 April 2017
Alphabet (Buy, $1,025 PO)
Stock view: Expect solid 1Q revs., but loss of non-GAAP reconciliation a concern
New concerns have been raised on the YouTube advertiser pullback, but with the cuts in
spending surfacing primarily in the back half of March, we anticipate only modest
impact to 1Q revenue, with more significant potential impact to 2Q17 (see Advertiser
boycott raising concerns on 1Q/2Q revenues). Looking beyond the YouTube issues, our
early 1Q ad checks were mostly positive, with Merkle highlighting modest revenue
growth acceleration, better than the 70bps of ex-FX Website revenue deceleration in
1Q17 (vs 4Q16) we’ve assumed in our model. Overall, we expect in-line to slightly
better 1Q results driven by mobile and PLA strength (and perhaps some maps ads), but
see risk of moderate Street estimate cuts for 2Q/3Q revenue on YouTube concerns. For
most companies, we would expect management to help clear up the advertiser
controversy on the call with some added financial disclosure or guidance, but predicting
what Alphabet will say on the topic is more difficult.
1Q results will be the first quarter that Google reports GAAP EPS without a non-GAAP
EPS reconciliation. With higher than usual SBC in 1Q due to changes in grant timing, it
is possible Google misses Street GAAP EPS. We are leaving our revenue unchanged but
lowering GAAP EPS to $7.26 from $7.36 based on higher SBC. Also, unusual charges are
more likely to be controversial for Google without a non-GAAP EPS reconciliation.
Core margins remain a key focus, as has been the case since 3Q16 when core Google
non-GAAP operating margins contracted 95bps y/y. We expect core margins to remain
down y/y driven primarily by segment mix, and our model assumes 2017 core margins
are down 50bps in 2017 (to 46.1%) and another 20bps in 2018 (to 45.9%). For 1Q17,
we assume 45.8% core Google non-GAAP operating margin, up 30bps q/q and down
75bps y/y. Our recent deep dive analysis suggests segment mix alone drives a natural
220bps margin headwind, which we think can be partially offset with 1) upside in high
margin search growth from monetization growth (clicks and pricing); 2) leverage in
individual segments from scale; and 3) cost cutting measures across the business (see
Digging into the Alphabet revenue mix and margin drivers).
We continue to like the stock, but recognize that potential estimate trimming on
YouTube concerns, further margin contraction, SBC pressure on GAAP EPS and
challenging 2Q17 comps could continue to drag on near-term sentiment. Looking ahead,
we are optimistic on 2H17 based on the potential for new ad format ramps, easing
comps, and potential YouTube relief (we assume the advertiser boycott eases exiting
2Q). Alphabet trades at 22x GAAP (17x ex-Other Bets, cash), in-line with the S&P and
in-line to below the 5-year average (23.5x), which we view as attractive.
Key theme/metric(s) for 1Q: Website growth, core margins
We believe the key metrics for the quarter will be ex-FX Website growth and core
margins. For ex-FX website growth, we currently model 70bps of deceleration in 1Q17
(vs 4Q16), and we think deceleration could persist through 2Q17, after which the y/y
growth comps ease considerably.
Internet/e-Commerce | 06 April 2017 11
Chart 8: Google ex-FX Y/Y growth trends
30%
25%
20%
28%
25%
24%
24% 24%
22% 22%
22%
21%
18%
15%
10%
5%
0%
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17E
2Q17E
3Q17E
4Q17E
Total Google Revenue Y/Y (ex-FX)
Google Website Y/Y (ex-FX)
Source: Company reports, BofA Merrill Lynch Global Research
For core margins, we assume y/y contraction through 3Q17, after which we model a
slight uptick in 4Q17. For the year, we assume core Google margins contract 50bps to
46.1%. In terms of blended Alphabet non-GAAP operating margins, we assume 70bps of
y/y contraction to 40.7% in 2017, but won’t be surprised if better cost discipline
(particularly in Other Bets) drives more stable y/y trends.
Table 9: Core Google non-GAAP operating margin forecast
1Q16 2Q16 3Q16 4Q16 1Q17E 2Q17E 3Q17E 4Q17E 1Q18E 2Q18E 3Q18E 4Q18E
Core Google non-GAAP operating margin 46.5% 47.9% 46.5% 45.5% 45.8% 46.5% 45.6% 46.4% 45.6% 46.5% 45.4% 46.3%
Y/Y Change 1.4% 1.6% -1.0% -1.5% -0.7% -1.4% -0.9% 0.9% -0.2% -0.1% -0.2% -0.1%
Source: Company, BofA Merrill Lynch Global Research
Biggest 1Q issues/risks:
• Deceleration in Google Website revenue: There could be modest revenue
pressure due to YouTube boycott impact, and/or ad shift to Facebook. One SEM
suggested a modest uptick in advertising spend on maps, which could be a positive
in 2017.
• TAC to distribution partners: Rising TAC rate (Apple, Samsung) could mitigate
potential gross revenue upside in the higher margin mobile search segment.
• Growth investments could drag on margins: Investments in Google Cloud,
hardware, and YouTube could be higher than we expect, which could negatively
impact core Google margins and raise concerns on long-term sustainable margin
levels.
• YouTube/Display Network commentary: While we do not expect full resolution on
the YouTube/Display Network issues, management’s tone will likely impact
expectations for timing of a fix, corresponding costs, magnitude of the boycott
losses, and time to recover lost ad spend.
• Stock comp timing shift could cause some GAAP lumpiness: Shift in timing of
annual stock-based comp grants could impact 1Q EPS, but should be offset with
lower relative cost in 2H17.
Top 1Q data point:
Our early 1Q checks (pre quarter end) have been mostly positive, but most checks did
not contemplate a potential impact of the YouTube & Display Network pullback.
ComScore PC click data has suggested Google PC queries are down 3% q/q QTD, slightly
worse than the 2% q/q decline in 1Q16.
12 Internet/e-Commerce | 06 April 2017
Estimate vs Consensus
Our revenue and EBITDA estimates of $20.2bn/$9.9bn are slightly above the Street at
$19.9bn/$9.8bn. Our model assumes currency to be a 2% headwind on y/y international
revenue in 1Q17 (similar to 4Q16) and a 3% headwind in 2Q17. Our 1Q17 non-GAAP
EPS of $9.53 is slightly above consensus at $9.45, and on a GAAP basis, our 1Q
estimate for $7.26 is slightly below the Street at $7.42. For 2017, we are above on
revenue, EBITDA, and non-GAAP EPS, but slightly below on GAAP EPS.
Table 10: Alphabet Estimate Summary
1Q17 2Q17 2017 2018
Revenue
BofA ML est. $20,219 $21,009 $88,636 $104,228
Growth Y/Y% 23% 20% 21% 18%
Street $19,891 $20,867 $87,691 $102,632
BofA ML vs Street Above Above Above Above
EBITDA
BofA ML est. $9,897 $10,428 $43,457 $50,670
Street $9,788 $10,384 $43,264 $50,252
BofA ML vs Street Above Above Above Above
EPS
BofA ML est. $9.53 $10.02 $41.82 $48.45
Street $9.45 $10.09 $41.12 $48.56
BofA ML vs Street Above Below Above Below
GAAP EPS
BofA ML est. $7.26 $7.75 $32.66 $37.81
Street $7.42 $8.06 $33.31 $39.16
BofA ML vs Street Below Below Below Below
Source: BofA Merrill Lynch Global Research, Bloomberg, as of 4/4/2017
Given the recent YouTube & ad network concerns, it’s possible stock sees a lift on inline
EPS if commentary on content fixes and advertiser pullback is constructive. We are
comfortable with our $1,025 price objective, based on 21x core Google GAAP EPS plus
cash. Our PO multiple is within the five year range of 12-24x forward P/E. Easing
comps and potential new ad format ramps (Google’s advertiser conference is May 23)
could be positive 2H drivers.
Internet/e-Commerce | 06 April 2017 13
Amazon (Buy, $1,100 PO)
Stock view: Positive on retail, but street increasingly focused on advertising
For Amazon’s retail business, sentiment remains positive despite some modest 4Q
revenue weakness vs expectations. We expect the retail business to remain strong in
1Q with stable growth as core drivers (Prime, delivery infrastructure advantage) remain
intact. The lack of early tax refund support is a potential 1Q risk, but we would expect
any delayed spending to bounce back in March or 2Q. Continued store closures by
traditional retailers should aid the online shift throughout 2017. Finally, it appears
Amazon has become stepped up advertising on its site, with more sponsored listings,
which could be a source of revenue upside in 2017. Amazon had new revenue
disclosures in its 10-K, and the ad revenue line significant accelerated in 2016.
For AWS, we expect some additional q/q revenue deceleration and q/q declines in
margins. We note that AWS growth in 4Q was below our estimates, and the effects of
4Q’s late price cuts should drive additional deceleration in 1Q. Microsoft and Google
are well capitalized competitors that are significantly increasing cloud investment (see
Battle in Seattle for industry update), so the Street sentiment could shift more
cautiously on Amazon on a slight miss.
Margins continue to be a risk, but top line trends seem to be the biggest driver of
sentiment and advertising optimism has grown. Amazon’s current investment cycle
began in earnest in 3Q’16, and we expect the elevated pace of investment to persist
through 3Q’17. Margins may see y/y declines given: 1) Ongoing investments in
fulfillment center build out (given fulfilled unit growth of 40% in 2016), 2) Digital
content and related marketing, 3) Prime benefits (Now and Fresh), 4) Alexa/Echo, and 5)
India. We think the Street is constructive on these initiatives, and will move past lower
y/y margins concerns if top line growth is stable in 1Q.
Key theme/metric(s) for 1Q: AWS growth and 2Q profit outlook
We forecast 43% y/y AWS growth in 1Q, down from 47% in 4Q, partially due to the
lingering effects of price cuts that went into effect on December 1 st . This implies 4%
q/q growth v. 9% last quarter. Increased investments in logistics/fulfilment, AWS,
marketing, Prime content and others could set Amazon up for disappointing margin
guidance vs. the Street’s expectations. However, we think the Street will focus on
revenue trends and ultimately view the investments as a long-term positives.
Biggest 1Q issues/risks:
• 2Q GAAP operating income outlook given increased investments in logistics, India,
Prime Instant Video content, as well as expected AWS deceleration
• Gross profit growth trends given expense issues and tougher growth comps in
1H17
• AWS margin trends given AWS price cuts and aggressive competition
• International segment performance given investments in India
1Q traffic data points mixed
comScore’s US data indicates that Amazon PC user growth has been down 2% y/y in 1Q
through February vs. 4Q at -5% y/y. Mobile user growth is up 8% y/y vs. up 9% in 4Q.
Amazon’s total mobile and PC minutes were down 5% y/y in 1Q through February vs. up
18% y/y in 4Q; mobile minutes were down 7% y/y in 1Q vs. +18% y/y in 4Q.
1Q items/news:
• Logistics investments: Amazon announced a $1.5bn air hub in Northern Kentucky
that will host Amazon’s own cargo airline.
• AWS outage: AWS had a large outage in early March. Investors will likely focus on
the competitive implications of the outage.
14 Internet/e-Commerce | 06 April 2017
• Walmart continuing to acquire eCommerce assets and launching free 2-day
shipping: Investors will likely focus on Amazon’s results relative to Wal-mart.
• Amazon Business: Amazon Business announced a multi-year agreement with a
public sector co-op, worth $500mn/year with a 5 year contract and 6 option years
(see Now we’re in Business: Amazon announces new B2B contract with public
sector co-op).
• Prime Now expansion: Prime Now launched 1-hour delivery in Milwaukee and
Boston during the quarter. Amazon also launched the ability for Alexa users to make
Prime Now orders.
• Upcoming 2Q events: AWS Summit SF (April 18-19), new Prime Instant Video
content rollout (Manchester by the Sea, Bosch season 3, I Love Dick).
• Souq.com acquisition: Amazon has an agreement to acquire Souq.com, the leading
eCommerce platform in the Middle East. Terms were not disclosed, though press
reports indicate that Amazon had bid $650mn for the company before Emaar Malls
made a public bid of $800mn. The deal is expected to close in 2017.
• Physical store rollout: Amazon has launched or planned to open 10 AmazonBooks
stores, is beta testing its AmazonGo grocery store concept (though public opening
was delayed due to technology issues), and there are press reports that Amazon is
testing other grocery store formats as well.
• Google Cloud Conference: No significant price announcements were made, but
Google’s conference was much more impressive this year (see What a difference a
year makes for Google Cloud).
Souq.com brings Amazon into the Middle East
Amazon announced that it has an agreement to acquire Souq.com, the leading
eCommerce platform in the Middle East. Terms were not disclosed, though press
reports indicate that Amazon had bid $650mn for the company before Emaar Malls
made a public bid of $800mn. This will represent Amazon’s largest deal since the
$970mn Twitch acquisition in 2014.
Souq.com does not disclose its sales or earnings, making it difficult to assess the
acquisition multiple or potential accretion of the deal. An $800mn acquisition implies
0.2% of Amazon’s current market cap. Though it is somewhat surprising for Amazon to
acquire a company in order to enter a new market, Amazon can leverage logistics,
sourcing, customer, and technology investments at Souq.com. The deal is expected to
close in 2017. Souq.com offers 8.4mn products across 31 categories, including
electronics, health & beauty, fashion, home goods, and baby. The site has 45mn monthly
visitors and localized operations in Saudi Arabia, UAE, and Egypt and localized sites for
the UAE, Egypt, Saudi Arabia, Kuwait, Bahrain, Oman, and Qatar. Euromonitor estimates
that Middle East & Africa GMV is $9bn market in 2016 though other reports peg the
market at $20bn, implying roughly 1-2% eCommerce penetration in the region vs. midteens
in Western markets. Press reports last year indicated that Amazon was exploring
entering Australia and Singapore in 2017. The Souq.com acquisition may signal a more
aggressive global expansion plan.
Estimates vs. Consensus: Above Street revenue and EPS
We expect 1Q revenue/EPS of $35.3bn/$2.34 vs. Street at $35.3bn/$2.28. Amazon’s 1Q
revenue guidance is $33.25-35.75 and GAAP operating income of $250-900 (we are at
$898mn in operating income). Our 1Q revenue estimate of $35.3bn (+21% y/y vs. 22%
in 4Q16) is based on 24% y/y unit growth vs. 24% y/y in 4Q. For 1Q17, we estimate
-19% q/q revenue growth vs -19% q/q in 1Q last year. We are below the street for 2Q
margins.
Internet/e-Commerce | 06 April 2017 15
Table 11: Amazon Estimate Summary
1Q17 2Q17 2017 2018
Revenue
BofAML est. $35,335 $36,784 $164,532 $194,826
Growth Y/Y% 21% 21% 21% 18%
Street $35,255 $36,815 $165,158 $199,387
BofAML vs. Street Above Below Below Below
EBITDA
BofAML est. $4,153 $4,626 $18,246 $22,022
Street $4,085 $4,835 $19,382 $24,850
BofAML vs. Street Above Below Below Below
EPS
BofAML est. $2.34 $2.86 $10.90 $14.37
Street $2.28 $3.30 $12.60 $18.16
BofAML vs. Street Above Below Below Below
Source: BofA Merrill Lynch Global Research estimates, Bloomberg, as of 4/4/2017
Our PO of $1,100 is based on our SOP that values AWS at $127bn or $259 per share
and the retail business at $413bn or $841 per share. Our 5.5x AWS multiple is a modest
premium to the software/SaaS comp group at 5.0x on 2018 sales, and 0.9x multiple is a
premium to a retail general merchandise comp group at 0.7x. We think the premiums are
warranted given share gains and superior growth. Our $1,100 price objective implies
2.8x 2018E Price/Sales, a multiple above the high end of Amazon's historical range of
1.0-2.5x. We argue the historical P/S multiple should increase given positive 3rd party
sales (3P) that is reported on a net basis, a higher AWS revenue contribution, an
increasing advertising contribution, and record gross profit margins.
16 Internet/e-Commerce | 06 April 2017
eBay (Buy, $38 PO)
Stock view: Marketplace growth should improve in 2017
eBay’s 4Q results showed signs of Marketplace improvement, with improving mobile
and C2C trends and a modest pickup in new buyers. Management expects to put
marketing dollars behind this trend to drive Marketplace growth momentum in 2017
(guidance calls for 1 point of acceleration in Marketplace volume in 1Q, with 2 points for
the full year). Expectations have risen since the start of the year, and we think eBay
needs to deliver 1 point acceleration in US GMV growth vs 1Q to maintain confidence in
management’s execution. There is also significant interest in eBay’s first party ad
strategy and potential improvement in transaction take rates (at expense of MS&O
revenues).
The potential structured data impact also remains top of mind for investors as
structured data will provide the backbone for improving customer search and product
experiences. As of 4Q’16, there are 180mn+ structured data pages v. 100mn+ pages at
the end of 3Q’16. More pages are expected in 2017, which will start to be exposed to
core organic traffic. Management appears confident that the impact of structured data
would increasingly benefit results and that structured data formats will be much more
visible by holiday 2017. Overall, if 1Q results are at/above expectations, we think the
stock will reflect even more optimism on structured data improvement.
For margins, we expect continued pressure in 2017 as the company ramps up marketing
spend and increases its AI capabilities. If the company can manage to accelerate top
line growth through conversion rate improvements, some of the upside may be invested,
limiting 2017 earnings flow through (but benefitting growth in 2018). Therefore, we
think customer, transaction and revenue trends most important for 2017, but lack of
margin flow through could be sentiment headwind for the stock.
Key theme/metric(s) for 1Q: Marketplace growth/outlook
Our model assumes US GMV growth of 3.5% y/y, an 80bps q/q acceleration off an 80ps
easier y/y comp, while we anticipate 6.0% y/y Intl ex-FX GMV growth. US acceleration
(despite a modest Leap Year headwind) is likely needed to maintain increased
management confidence. Our model assumes 8.3% take rate, which is up 10bps y/y and
could be aided by the early transition to 1 st party advertising on the site. eBay’s 1Q
revenue guide implies 5% y/y ex-FX growth at the midpoint, while the 2017 revenue
guide calls for 7% ex-FX growth, implying revenue growth acceleration during the year.
Chart 9: eBay quarterly GMV and revenue y/y growth
10%
5%
0%
-5%
-10%
-15%
-20%
1Q15A 2Q15A 3Q15A 4Q15A 1Q16A 2Q16A 3Q16A 4Q16A 1Q17E 2Q17E 3Q17E 4Q17E
Revenue Growth
GMV Growth
Source: BofA Merrill Lynch Global Research estimates, company report
Biggest 1Q issues/risks:
• Overall GMV growth remains muted as structured data changes still early, reducing
confidence in future improvement.
Internet/e-Commerce | 06 April 2017 17
• StubHub trends as StubHub GMV comps are tough in 1H’17 (32% y/y growth in
1H’16).
• Marketing expenses are expected to increase, putting pressure on margins and
could raise concerns that GMV growth is being “bought”.
Early 1Q traffic data points mixed
comScore’s eBay desktop unique visitors decreased 6% on average through February vs.
down 2% in 4Q. comScore’s total eBay mobile and PC minutes declined 20% y/y on
average through February in 1Q vs. down 17% y/y in 4Q. comScore indicates mobile
minutes decreased 38% vs. down 20% in 4Q.
Estimates vs. Consensus: Expect modest EPS upside
We expect eBay to report broadly in-line revenue/EPS estimates of $2.21bn/$0.49 vs.
the Street at $2.21bn/$0.48 (guidance is $2.17bn-$2.21bn and $0.46-$0.48). Our model
assumes 11mn shares repurchased in 1Q (about $350mn of repurchase activity). We
have adjusted our GAAP EPS for higher amortization of deferred tax asset.
Table 12: eBay Earnings Summary
1Q17 2Q17 2017 2018
Revenue
BofAML est. $2,210 $2,340 $9,458 $10,062
Growth Y/Y% 3% 5% 5% 6%
Street $2,206 $2,315 $9,398 $9,925
BofAML vs. Street Above Above Above Above
EBITDA
BofAML est. $855 $843 $3,520 $3,735
Street $841 $827 $3,494 $3,726
BofAML vs. Street Above Above Above Above
EPS
BofAML est. $0.49 $0.48 $2.03 $2.22
Street $0.48 $0.47 $2.01 $2.21
BofAML vs. Street Above Above Above Above
Source: BofA Merrill Lynch Global Research estimates, Bloomberg, as of 4/4/2017
Our $38 price objective is based on 17x our 2018E non-GAAP EPS. O ur 17x P/E
multiple is slightly ahead of the retail comp group average of about 16x, reflecting
eBay's potential for a Marketplace growth acceleration (to well above average retail
growth) in 2017. With 6-8% growth and an 8% FCF yield, we think eBay remains an
interesting value stock for retail investors, although GARP focused Internet investors
may prefer stronger growth at Google or Priceline.
18 Internet/e-Commerce | 06 April 2017
Expedia (Buy, $146 PO)
Stock view: 1Q faces tough comps, but should clear way for strength into ‘18
We think 1Q expectations are somewhat muted as Expedia has highlighted several
earnings headwinds in early 2017, including incremental cloud migration spend, higher
marketing spend and, recently, potential ADR pressure. 1Q’17 earnings will face the
toughest room night growth comps, though Expedia expressed optimism on trends
through January on the 4Q call. Comps ease during the rest of the year for Expedia,
which we see as a positive set up for the stock. We think Expedia will reiterate its 10-
15% EBITDA growth outlook and .Expedia remains our top 2017 summer (2Q/3Q) travel
idea.
We currently forecast 20% y/y room night growth in 2Q/3Q, though the comp is
1600bps easier vs. 1Q and street growth expectations could be higher. The ongoing
benefit of conversion rate improvements, the Easter shift into 2Q (noted as 1% impact
in 2Q’16), as well as the benefit of more aggressive marketing spend should aid 2Q
growth. Additionally, prior to 1Q’17 earnings, Expedia will begin to disclose HomeAway
online bookings and room nights, which we think may drive y/y room night growth 200-
300bps higher (we forecast HomeAway room nights up 50% y/y in 2017 vs. core OTA
room nights up 18%). We think investors will also view HomeAway disclosure positively
if the data indicates that the HomeAway transition remains on track and provide
visibility into potential EBITDA acceleration in 2018.
STR data suggests hotel fundamentals deteriorated modestly in the US through initial
March readings, but improved slightly in Europe through February. However, Expedia’s
CEO commented in a recent interview with the Financial Times that international
tourism to the US (Expedia’s key market) has decelerated following the introduction of
Trump’s travel bans, which may be a downside risk to 1Q bookings and revenues. This
mirrors ForwardKeys data from early March that after Trump’s executive order, foreign
tourism bookings to the US fell, then rebounded when the ban was suspended, but
declined again when the ban was re-introduced. A few US hotel operators have
indicated little impact from travel bans, so data is mixed.
Key theme/metric(s) for 1Q: room night growth vs industry and Priceline
We expect 1Q organic room night growth to remain steady at 16% y/y, though we note
that this does not yet include the contribution from HomeAway, which we think should
add 200-300bps to y/y growth. We expect N. America bookings growth of 12% y/y vs.
8% in 4Q, Int’l bookings (FX-neut.) of 14% y/y.
Biggest 1Q issues/risks:
• Room nights may disappoint on tougher 1Q comps, negatively impacting the
acceleration thesis
• Expedia’s CEO commented in a recent interview with the Financial Times that
international tourism to the US (Expedia’s key market) has decelerated following
the introduction of Trump’s travel bans, which may pressure hotel ADRs and be a
downside risk to 1Q bookings
• Pace of investments, namely cloud IT spend ($110mn in 2017) and marketing ramp
• HomeAway EBITDA trends given marketing spend ramp and pressure on
subscription revenues. Street has high expectations for the business.
• Pressure on hotel take rates given agency mix shift and rewards programs
Early 1Q RevPAR data decelerates
According to STR, 1Q US RevPAR through initial March readings decelerated 30bps to
3.0% y/y, and European RevPAR through February accelerated 600bps q/q to 3.6% y/y
Internet/e-Commerce | 06 April 2017 19
(FX-neutral). The STR data reflects a continued gradual deceleration in US RevPAR
growth and a more recovery in European RevPAR growth as the region laps terrorist
attacks and geopolitical uncertainty.
Table 13: US and European RevPAR Y/Y Change
US
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17
Mar-
17** 1Q16 2Q16 3Q16 4Q16 1Q17
Occupancy -0.3% -0.8% -0.4% 2.2% -0.5% 0.3% -1.0% -0.4% 1.6% -0.3% 2.5% -0.1% 0.5% -0.5% 1.6% -0.5% 0.7% 0.1% 0.7% 0.5%
ADR 2.8% 3.6% 3.2% 2.8% 2.4% 3.5% 3.6% 2.5% 3.9% 1.9% 3.4% 2.4% 3.2% 1.7% 2.6% 3.2% 2.9% 3.3% 2.6% 2.5%
RevPAR 2.4% 2.8% 2.7% 5.0% 1.9% 3.8% 2.5% 2.1% 5.6% 1.6% 5.9% 2.3% 3.8% 1.2% 4.2% 2.7% 3.6% 3.4% 3.3% 3.0%
Europe
Occupancy 1.4% 1.5% 0.3% 3.5% -0.3% -0.7% -0.4% -1.5% 0.8% -0.4% 4.2% 4.5% 5.1% 2.9% 1.1% 0.8% -0.4% 2.8% 4.0%
ADR -4.3% -2.7% 2.5% 3.2% 0.3% -4.5% -0.7% -4.8% -1.8% -8.6% -5.3% -5.0% -2.1% -3.1% -1.5% -0.3% -2.4% -6.3% -2.6%
RevPAR -2.9% -1.3% 2.8% 6.8% -0.1% -5.1% -1.1% -6.2% -1.0% -9.0% -1.3% -0.7% 2.9% -3.1% -0.5% 0.5% -2.8% -3.7% -0.1%
Europe in Euros Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 1Q16 2Q16 3Q16 4Q16 1Q17
Occupancy 1.4% 1.5% 0.3% 3.5% -0.3% -0.7% -0.4% -1.5% 0.8% -0.4% 4.2% 4.5% 5.1% 2.9% 1.1% 0.8% -0.4% 2.8% 4.0%
ADR 0.0% -0.2% -1.7% -0.1% -0.9% -4.4% -2.7% -4.6% -1.6% -8.5% -5.4% -1.5% -0.9% 0.2% -0.7% -1.8% -3.0% -5.2% -0.4%
RevPAR 1.4% 1.2% -1.4% 3.3% -1.2% -5.0% -3.1% -6.0% -0.9% -8.9% -1.4% 2.9% 4.2% 3.0% 0.4% -1.0% -3.3% -2.4% 3.6%
Source: Smith Travel Research (STR), BofA Merrill Lynch Global Research estimates; Note: **March data is month to date
Estimates vs. Consensus: In-line 1Q revenue and EPS
We expect 1Q revenue/EPS of $2.13bn/$0.07 vs. the Street at $2.14bn/$0.06 driven by
8% core OTA growth, 48% Trivago growth (in USD), 2% Egencia growth, and 16%
HomeAway growth. We expect room night growth to remain stable at 16% in 1Q’17
before accelerating on easier comps in 2Q/3Q. Expedia guided 2017 EBITDA growth to
10-15% and our 2017 EBITDA forecast of $1.86bn (15% y/y growth) is modestly above
the Street at $1.83bn (14% y/y growth).
Table 14: Expedia Estimate Summary
1Q17 2Q17 2017 2018 2019
Revenue
BofAML est. $2,134 $2,555 $10,097 $11,424 $12,931
Growth Y/Y% 12% 16% 15% 13% 13%
Street $2,140 $2,507 $10,010 $11,266 $12,429
BofAML est. vs. Street Below Above Above Above Above
EBITDA
BofAML est. $182 $379 $1,857 $2,141 $2,416
Street $179 $367 $1,835 $2,212 $2,628
BofAML est. vs. Street Above Above Above Below Below
EPS
BofAML est. $0.07 $0.99 $5.54 $6.84 $7.71
Street $0.06 $0.94 $5.38 $6.88 $8.55
BofAML est. vs. Street Above Above Above Below Below
Source: BofA Merrill Lynch Global Research estimates, Bloomberg, as of 4/4/2017
Our $146 price objective is based on our sum of the parts (SOP) that assumes 9x 2018E
EBITDA for the core OTA business (a discount to Priceline at approx. 15x due to slower
organic growth and higher taxes on earnings), 8x 2018E EBITDA for Egencia (we expect
single digit growth), 60% ownership of Trivago (using our PO), and 15x 2018 EV/EBITDA
for HomeAway, plus net cash and long term investments.
20 Internet/e-Commerce | 06 April 2017
Facebook (Buy, $165 PO)
Stock view: Becoming the one-stop social shop
We expect Facebook to report upside to Street 1Q revenue (but less in absolute dollars
than in 4Q) driven by robust demand, Instagram momentum, and solid underlying user
growth and engagement. Early ad checks in the quarter indicate steady advertiser
trends, with some elements of seasonality off a stronger 4Q, and strength at Instagram.
We expect pricing tailwinds to begin to pick up as we approach ad inventory supply
moderation in 2H17, and a flurry of new product introductions could provide additional
sources of ad load inventory over time. Overall, we see 1Q as an in-line to slightly better
quarter, and are optimistic on the set-up for the remainder of the year for pricing,
expense management, user engagement, and new platforms/feature ramps. Facebook
will be hosting its F8 developer conference before earnings in San Jose on April 18-19.
Facebook had another busy quarter of new product launches with a notable trend of
Snapchat-like features (Stories, Direct ephemeral messaging) and Video. At this point,
we believe the Snap threat is less of a near-term concern. Recent key product/feature
releases include:
• Stories for all: On the tail of a successful Instagram Stories launch in 8/16,
Facebook rolled out WhatsApp Status (2/17), Messenger Day (3/17), and Facebook
Stories (3/17).
• Direct ephemeral messaging: After introducing ephemeral direct photo/video
sharing on Instagram in 11/16, Facebook announced a comparable feature with
integrated filters/masks/frames for the core Facebook app in 3/17.
• Video App for TV: Announced in February, new app for Apple TV, Amazon Fire TV,
and Samsung Smart TV to enable FB video viewing on TV.
• New ad products: Instagram Stories ads (1/17) a positive tailwind to Instagram ad
load, while vertical video ads (Facebook 9/16, Instagram 11/16) and Collections
(3/17) are likely positive for pricing.
While, in many ways, Facebook is duplicating Snapchat’s innovation, we are encouraged
with the rate of new product introductions and view the Facebook Stories and Direct
ephemeral messaging (with filters/masks) as positives for user engagement and
potential barriers to competitive risk. While management’s focus in the near-term will
likely be on new feature adoption, we expect Stories ads within 1-2 quarters and the
company is already establishing partnerships for branded masks/filters (see More
Stories in the Snap competitive saga). Over time, we would not be surprised to see
filter/mask features and ads added to WhatsApp and, possibly, Messenger, which could
unlock new monetization potential.
On the expense front, we continue to view management’s 2017 expense growth
forecast (47-57%) as conservative. History would seem to suggest manage could trim
the top of the range on the 2Q earnings call, with more meaningful revisions in 2H17.
That said, we won’t be surprised if management maintains the outlook on the April call,
particularly given the velocity of new feature launches and potential investments in
video content.
Internet/e-Commerce | 06 April 2017 21
Chart 10: 2017 expense forecast now reflected in estimates; potential for favorable revisions ahead
75%
70%
65%
60%
55%
50%
45%
40%
35%
30%
25%
2015A: 51%
2016A: 41%
2014A: 34%
4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
2014 2015 2016 2017
Source: Company, BofA Merrill Lynch Global Research
Key theme/metric(s) for 1Q
Underlying MAU and DAU trends are still the key metrics for the stock, in our view. We
assume MAUs grow 16% y/y to 1.91bn and DAUs 16% to 1.26bn, keeping DAU/MAU at
a steady 66%. It’s possible (but hard to predict) that management offers an update on
Instagram users (600mn MAU, 400mn DAU in 4Q), and more specifically, Instagram
Stories (150mn DAU in January). On the messaging front, there could be a Messenger
user update (1bn as of 7/16), while a WhatsApp update is less likely (1.2bn as of 4Q16).
We expect ad impressions to grow 46% y/y (49% in 4Q) and ad prices to increase 2%
y/y (3% in 4Q).
Biggest 1Q issues/risks:
• Expense trajectory or lack of an expense guidance change could disappoint:
While we continue to anticipate favorable revisions to management’s 2017 expense
forecast in 2H, near-term adjustments may be less likely given the velocity of new
product launches and potential video content investments.
• 1Q ad revenue deceleration possible: We note that 4Q was particularly strong
and it’s possible 1Q normalization could result in revenue growth deceleration.
• Lack of commentary on monetization strategy: While Messenger/WhatsApp
monetization is likely still a 2018 story, lack of constructive commentary on timing
could disappoint.
• User deceleration always a risk: MAU and DAU growth has surprised to the upside
at mid-to-high teens y/y growth, and any meaningful slowdown could raise
competitive concerns.
Top 1Q data point: Instagram reaches 1mn advertisers
Mid-quarter data points were somewhat limited in 1Q, though management did give an
update on the Instagram monetization efforts. In a March 2017 update, management
indicated that Instagram grew to 1mn advertisers, double the number since 9/16, with
business profile pages up to 8mn from 5mn in 4Q. Facebook’s comparable metrics are
4mn advertisers (as of 9/16) and 65mn business pages (4Q16).
For early advertiser checks, general feedback suggested positive trends, but more
‘steady as it goes’ than absolute blow out. The stronger 4Q was highlighted as a tough
22 Internet/e-Commerce | 06 April 2017
comp, but overall demand remains robust. Instagram feedback was notably positive,
with many suggesting the demand is additive (not reallocation from core Facebook).
Estimates vs Consensus
Our 1Q17 and 2Q17 revenue and EBITDA estimates are ahead above the Street. We
assume ~800bps of advertising growth deceleration in 3Q and another ~400bps in 4Q,
and our 2017 estimates are also slightly above consensus. On that premise, we are
comfortable that Street estimates sufficiently reflect potential impact of News Feed ad
load deceleration in 2H17.
Table 15: Facebook Estimate Summary
1Q17 2Q17 2017 2018
Revenue
BofA ML est. $7,905 $9,303 $38,546 $48,882
Growth Y/Y% 47% 45% 39% 27%
Street $7,798 $8,993 $37,774 $48,103
BofA ML vs Street Above Above Above Above
EBITDA
BofA ML est. $4,886 $5,844 $24,358 $30,905
Street $4,743 $5,638 $23,775 $30,409
BofA ML vs Street Above Above Above Above
EPS
BofA ML est. $1.14 $1.37 $5.67 $7.01
Street $1.11 $1.30 $5.43 $6.75
BofA ML vs Street Above Above Above Above
GAAP EPS
BofA ML est. $0.94 $1.17 $4.86 $6.02
Street $0.86 $1.06 $4.45 $5.76
BofA ML vs Street Above Above Above Above
Source: BofA Merrill Lynch Global Research estimates, Bloomberg, as of 4/4/2017
Our $165 price objective is based on 24x our non-GAAP 2018E EPS and 27x GAAP EPS,
multiples equal to about 1x 2018E revenue growth, mostly in-line with its social and
online media peers. Facebook is our top large cap idea for positive estimate revision
potential in 2017.
Internet/e-Commerce | 06 April 2017 23
GrubHub (Buy, $49 PO)
Stock view: Marketing ramp should drive diner growth re-acceleration
In recent quarters, GrubHub has been leveraging a series of recent investments,
including expanded delivery, more restaurants on the platform, repositioned brand
driving more effective advertising, and product optimization, which is driving higher
conversion rates. We think GrubHub is well-positioned to continue to leverage these
investments to drive growth in 2017 and beyond.
GrubHub’s delivery business is reaching scale in more markets, and delivered gross food
sales run-rate increased from $500mn in 3Q to nearly $600mn in 4Q (20% of ’16 food
sales). Delivered orders were 40% higher than in 3Q. We think delivery will continue to
drive take rate higher and be EBITDA accretive by YE17 as efficiencies are gained.
Competition remains a key concern for investors and weighs on sentiment. However, we
believe that GrubHub’s user base is sticky and its repeat order rate (>90%) is defensible.
In 2016, as UberEats, Amazon Prime Now, DoorDash, and Postmates invested in
expansion, GrubHub’s active diner growth and order growth remained solid. Google
Trends indicates that over the past 12 months, though competitors have expanded to
more cities in the US, GRUB remains the overwhelming leader in the market, with both
of its core brands (GrubHub and Seamless) many times the size of any of its
competitors.
GrubHub 1Q results may also face a modest growth headwind from warmer weather in
key markets like NYC and Chicago. For context, in 4Q15, GrubHub called out warmer
weather was a 200bps y/y order growth drag (~$2mn in revenue, $12.7mn in gross food
sales). Warmer weather can impact order volume and new diner growth, though new
diners can partially shift to 2Q. We forecast 26% y/y gross food sales and 36% y/y
revenue growth in 1Q’17.
We think active diner growth will accelerate in 2017 as the company invests more
heavily in marketing and it comps out against its “quality over quantity” marketing
strategy started in 1Q16. Investors, however, should expect that accelerating active
diner growth will be counterbalance by lower order frequency as newer diners to the
system tend to order less frequently. At the same time, we expect take rate will
continue to expand as the delivery business grows.
Key theme/metric(s) for 1Q: gross food sales growth
We forecast gross food sales growth in 1Q of 26%, a modest deceleration from 27% in
4Q (flat with 4Q less the 1% hit from the lack of Leap Day in 1Q17). Though we think
there is likely upside to our forecast given a 500bps easier y/y comp in 1Q vs. 4Q. We
expect 1Q active diner growth of 25%, Grubs per Diner decline of 3%, and average order
size growth of 5%.
Biggest 1Q issues/risks:
• Despite positive Google Trends data and commentary from management, mounting
competition eats away at GRUB’s growth and take rate, driving diner acquisition
costs higher.
• Warmer weather during 1Q, particularly in GrubHub’s core NYC and Chicago
markets, may be a headwind to growth.
• RDS (restaurant delivery service) investments weigh on earnings at a rate higher
than the $3mn in EBITDA drag that we have in our model for 1Q’17.
• Site and conversion rate improvements turn out to be one-time in nature rather
than an ongoing, longer-term focus for management.
24 Internet/e-Commerce | 06 April 2017
• Marketing expense expected to ramp in 2017, which can weigh on earnings,
especially if gross food sales comes in weaker than anticipated.
Estimates vs. Consensus: Broadly in-line with consensus in 1Q’17
We expect 1Q revenue/EPS at $153mn/$0.25 vs. the Street at $153mn/$0.24 driven by
gross food sales growth and an improving take rate.
Table 16: GrubHub Estimate Summary
1Q17 2Q17 2017 2018
Revenue
BofAML est. $153 $159 $650 $815
Growth Y/Y% 37% 33% 32% 25%
Street $153 $158 $645 $782
BofAML vs. Street Below Above Above Above
EBITDA
BofAML est. $41 $46 $184 $247
Street $40 $46 $181 $225
BofAML vs. Street Above Below Above Above
EPS
BofAML est. $0.25 $0.29 $1.13 $1.55
Street $0.24 $0.28 $1.10 $1.37
BofAML vs. Street Above Above Above Above
Source: BofA Merrill Lynch Global Research estimates, Bloomberg, as of 4/4/2017
Our PO is $49, based on 32x our 2018E P/E (vs. high growth internet at 31x). We believe
GRUB warrants a premium to eCommerce peers due to the attractive margins of the
core business and, relative to the overall small-cap sector, GRUB has more attractive
margins and growth potential.
Internet/e-Commerce | 06 April 2017 25
Match.com (Buy, $21 PO)
Stock view: Positive on Tinder monetization growth on new products
Match has continued to build monetization on Tinder and we expect a more widely
released Tinder Boost as well as international marketing spend to have a positive impact
in 1Q17 results. The incremental revenue increase combined with Core enhancements
should drive ARPU forward, though we are still cautious given Core’s declining to flat
growth and project 1Q17 at $.0.57 (-3% y/y).
Another issue on the horizon for Match group is the high ownership percentage of IAC.
Based on our discussions with management, this is a known issue from both Match and
IAC’s perspective. The high degree of IAC ownership limits the float and has created a
disproportionate short interest on the company to obtain higher exposure to IAC’s core
(ex-Match) properties. Our conversations suggest we can expect further discussion
from management on ways forward in 2017, with the most likely outcome, in our view, a
spin off IAC’s Match ownership to IAC shareholders.
As Tinder expands, one concern we have is that its highly diverse user base could cause
an overload of options and limit user’s ability to find the type of matches they are
looking for. An “elite” version of the app was recently launched called “Select” (per
TechCrunch), highlighting the company’s focus on making sure users are able to find
suitable matches in different ways.
1Q17 should see international marketing spend on Tinder begin to pay off. We expect
that paid member count (PMC) will continue to trend up driven by Tinder and other
recent platforming initiatives helping to increase conversion on Core mobile and other
sites like Plenty of Fish (PoF) and Meetic.
Key theme/metric(s) for 1Q: International PMC growth
Key for the quarter will be international PMC growth and we expect international to
grow 25% y/y to 2.3mn and overall PMC growth to be up 17% y/y to 5.9mn as Tinder
marketing outside of the US should start paying off. We are still cautious on ARPU and
expect modest declines of 3% y/y, we believe there is still upside potential here driven
by Tinder Boost, released in September 2016 and Core turnaround efforts. Key issues
for the call will be PMC growth, Tinder monetization and Core improvements.
Biggest 1Q issues/risks:
• Decline in margins due to increased marketing of Tinder and Core improvement
• Drop in monetization as more consumers switch to mobile from PC.
• New investment initiatives drive down FY17 earnings projections.
Estimates vs. Consensus: Expect lower revenue, slight beat on profit
We are modeling rev/EBITDA of $293mn/$78.5mn below the Street due to impact of
Princeton Review sell off but higher on EBITDA vs. the Street’s $307mn/$77mn
estimate. We estimate total PMCs of 5.9mn in 1Q and average revenue per users of
$0.527 down 3% y/y due to lower monetizing Tinder plans. With the sale of Princeton
review closing 3/31 and management moving any income to discontinued operations,
we have removed all non-Dating revenue from our model and believe our treatment of
these discontinued operations (totally excluded from our estimates) is the reason our
estimates are currently below the street.
26 Internet/e-Commerce | 06 April 2017
Table 17: Match estimate summary
1Q17 2Q17 2017 2018
Revenue
BofA ML est. $293 $315 $1,285 $1,484
Growth Y/Y% 20% 20% 16% 15%
Street $308 $322 $1,325 $1,484
BofA ML vs Street Below Below Below Above
EBITDA
BofA ML est. $79 $112 $462 $562
Street $77 $113 $459 $544
BofA ML vs Street Above Below Above Above
EPS
BofA ML est. $0.14 $0.23 $0.95 $1.14
Street $0.13 $0.21 $0.88 $1.07
BofA ML vs Street In-Line In-Line Above Above
Street EBITDA margins 25% 35% 35% 37%
Source: BofA Merrill Lynch Global Research estimates, Bloomberg, as of 4/4/2017
Internet/e-Commerce | 06 April 2017 27
Netflix (Buy, $154 PO)
Stock view: Easy comps ahead with more content on the way
Heading into 1Q earnings, we expect Netflix to beat subscriber estimates given strong
recent content launches, and accelerating subscriber growth in Europe. Key 1Q titles
included A Series of Unfortunate Events, 13 Reasons Why, and Marvel’s Iron Fist. We
see few competitive issues this quarter to impact subscriber growth and we think the
release of Marvel’s Iron Fist likely helped quarter ending subscribers, despite low
metacritic scores. Fans of the Defender series still seem to be watching the show with
Parrot Analytics indicating viewership was just below Luke Cage its first week (though
viewership dropped by half within the first 10 days). In addition, fan ratings came in at
81% on Rotten Tomatoes despite the poor critic reception.
For 2Q, we expect a solid guide as Netflix laps 2Q16’s price increases internationally
and in the U.S. This should help churn rates for 2Q especially in Europe where we think
the bulk of Netflix subscriber growth will originate for 2017. In addition, Netflix has a
stronger slate of titles vs. 1Q including key franchises like House of Cards, Orange is the
New Black, Sense8, and other new series. Although competition is increasing in the
SVOD space with Amazon, Hulu and other making original content, we still see Netflix as
ahead of the competition due to: 1) sheer volume of content production with over 1000
hours in 2016, with strong local market content that can be leveraged globally, 2)
competitive price points vs competitors; and 3) the largest volume of 4K content which
attracts new TV purchases. 4K TVs could drive upside to estimates in FY17 as Netflix is
one of the few services with a library of 4K content.
For 1Q contribution margins, we estimate that Netflix will reach a new high at 41.3%
U.S. contribution margins somewhat offset by international contribution margins which
we expect to close to zero at 1.5%, but still a large improvement over 4Q’s 8% loss. We
expect Netflix to run its International division at new break even margins through FY17
and begin to gradually lift international margins in 2018. As Netflix reaches Intl
profitability, the investor story may focus more on EPS growth in the coming years.
Key theme/metric(s) for 1Q: Net sub adds internationally and 2Q guide
For 1Q we see two critical metrics that we think the Street will focus on; 1) Net Intl.
subscriber additions as Netflix laps the launch in 130 countries globally; and 2) 2Q net
subscriber guide for Netflix in the U.S. Although 1Q domestic subscriber ads are
important, we think the Street would be willing to look past a lower domestic number on
stronger international growth. In 2Q Netflix could potentially hit a flat subscriber
growth quarter as 2Q is typically seasonally weak, though we note the content slate for
2Q16 has several top franchises with new seasons.
Chart 11: Domestic subscribers
Chart 12: International subscribers
60,000
50,000
40,000
30,000
20,000
10,000
0
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
U.S. Subs (000's)
Y/Y Growth
International Subs (000's)
Y/Y Growth
Source: BofA Merrill Lynch Global Research estimates, company report
Source: BofA Merrill Lynch Global Research estimates, company repor
28 Internet/e-Commerce | 06 April 2017
Biggest issues/risks:
• Low reviews scores on Iron Fist effecting fan churn and causing some to question
Netflix’s ability to continue creating hit series
• Marketing spend in 1Q to drive subscriber growth
• Lower than expected contribution margins as Netflix invests in content.
• Content spending impact on FCF
Top 1Q data points: Traffic gains on PC
In the U.S., comScore reported quarter to date (Jan. and Feb.) average unique desktop
visitors up down 2% y/y to 40.5 million compared to 4Q up 22% y/y or 47 million, while
mobile unique users were flat y/y at 29.4mn users vs. up 19% y/y in 4Q. We note recent
comScore changes heavily impacted the y/y comparable data for several companies
including Netflix, in addition Comscore Data is PC only which is likely less relevant given
that a large portion of Netflix viewing is through connected TVs/devices.
Estimates vs. Consensus: In-line on revenue, slightly below on EPS
Our 1Q rev/GAAP EPS estimates of $2.71bn/$0.39 are above the Street’s estimates of
$2.64bn/$0.37. We estimate total domestic subs of 51.1 million, domestic DVD subs of
4 million, and international streaming subs of 48.3 million. Netflix a solid line up of
popular content in 2Q, especially May where it has Sense8 Season 2, Unbreakable
Kimmy Schmidt Season 3, War Machine (Movie), House of Cards Season 5 in May, and a
remake of Anne of Green Gables and Orange is the New Black in June which will likely
help U.S. domestic subscriber total stay positive in 2Q. In addition, we expect lower y/y
churn rates to potentially help subscriber growth.
Table 18: Netflix estimate summary
1Q17 2Q17 2017 2018
Revenue
BofAML est. $2,710 $2,854 $11,627 $13,937
Growth Y/Y% 38% 35% 32% 20%
Street $2,644 $2,760 $11,221 $13,448
BofAML vs. Street Above Above Above Above
EBITDA
BofAML est. $331 $306 $1,218 $1,758
Street $308 $245 $1,053 $1,710
BofAML vs. Street Above Above Above Above
GAAP EPS
BofAML est. $0.39 $0.30 $1.19 $2.04
Street $0.37 $0.23 $1.09 $1.98
BofAML vs. Street Above Above Above Above
Source: BofA Merrill Lynch Global Research estimates, company report
Internet/e-Commerce | 06 April 2017 29
Pandora (BUY, $9 PO)
Stock view: Focus on on-demand product, but questions on growth
Pandora’s recently launched on-demand subscription product will likely be the focus of
1Q investor call. Although the product is on limited release, we expect investor to focus
on initial reception of the product (positive reviews in media) and whether Pandora is
capable of growing the subscription base to 10mn over the next several years. Initially
Pandora will not likely see an impact on revenue from premium subscriptions as it is
giving current Pandora One subscribers a free six month trail of Pandora Premium which
may also impact subscription revenue for 1Q.
From our initial time with Pandora Premium, we found playlist creation smooth and easy
to use with Pandora quickly auto-filling play lists after picking a few songs, but Pandora
lacks the curated playlist selection found in Apple music and Spotify and we
encountered some missing songs/artists from the on-demand platform. The real
question will be whether Pandora’s platform is 1) good enough to pull exiting ondemand
users from other services to Pandora (Pandora indicated roughly 60% of
Pandora users are using another on-demand service); 2) can it convince people to
upgrade from free Pandora to Pandora Premium; and 3) how will Pandora grow its active
listener base from here. Pandora has had a largely stagnate active user base over the
last year and we think even with the new on-demand product could face difficulty
growing its users, especially as it increases its ad loads in key markets.
Key theme/metric(s) for 1Q: Ad rate growth and sub metrics
Pandora began rolling out Pandora Premium on March 15 th , and we think key questions
for the call will be; 1) initial reception of Pandora Premium; 2) when it will be fully
available to all users; 3) will Pandora Premium driving increased users; and 4) how have
ad load changes be received by free users. Pandora is increasing its ad load per hour to
increase its RPM rates, but this also risks alienating its already stagnant to declining
user base from the platform. 1Q will be the first measure to see if Pandora is able to
increase ad loads while maintaining its user base, the first step in stronger monetization
of its differentiated ad-supported radio product.
Biggest 1Q issues/risks:
• Investment spending in quarter and outlook for future S&M/R&D spend;
• Outlook for when Pandora will reach profitability again.
• Active listener or listening hour declines due competition;
• Commentary on outlook for Pandora Premium
Top 1Q data points: Triton Internet radio data
Triton media releases Internet radio metrics which give an initial read into the quarter,
but is limited to January data, Triton data shows Avg. Active sessions (analogous to
listening hour growth) declined 3% y/y which is tracking below our 1% y/y listener hour
growth est. of 5.58 billion hours. Session starts were up 4% y/y above our est. of 1% y/y
active user growth. We note that Spotify is now tracking more session starts than
Pandora implying market share loss to Spotify. Given the leap year, we would expect
February to track down Y/Y for monthly active listeners and user growth in February.
Estimates vs. Consensus: Slightly above on revenue, below on EPS
Our rev/Non-GAAP EPS est. of $319mn/($0.49) is slightly above on revenue, but in-line
on EPS compared to the Street est. at $318mn/($0.39). We model total listener hours
at 5.58bn and total RPM rates of $52. Our FY16 est. are slightly above on revenue, but
well above on EPS as we expect losses this year to improve in 2H16 as Pandora builds
up subs, but still see Pandora failing to gain much leverage from increased R&D
spending and S&M spend. We maintain our $9 PO, based on 1x our 2018 revenue
estimate, a discount to peers, but justified in our view as Pandora is likely to have a
difficult transition year as it builds it on-Demand service.
30 Internet/e-Commerce | 06 April 2017
Table 19: Pandora estimate summary
1Q17 2Q17 2017 2018
Revenue
BofAML est. $319 $397 $1,629 $2,036
Growth Y/Y% 18% 25%
Street $318 $390 $1,621 $2,050
BofAML vs. Street Above Above Above Below
EBITDA
BofAML est. -$73 $1 -$17 $25
Street -$73 -$16 -$38 $79
BofAML vs. Street In-line Above Above Below
EPS
BofAML est. -$0.49 -$0.04 -$0.21 -$0.19
Street -$0.35 -$0.14 -$0.49 -$0.03
BofAML vs. Street Below Above Above Below
Source: BofA Merrill Lynch Global Research estimates, Bloomberg
Chart 13: Listening hours and active users trends are essentially flat.
12%
10%
8%
6%
4%
2%
0%
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17E2Q17E3Q17E4Q17E
-2%
-4%
Listening Hours Y/Y Growth
Active Listners Y/Y Growth
Source: BofA Merrill Lynch Global Research estimates, company report
Internet/e-Commerce | 06 April 2017 31
Priceline (Buy, $1,920 PO)
Stock view: Expect solid 1Q top-line, but 2Q can be rough for guidance
Priceline’s metric trends and commentary, along with 1Q booking and room night
guidance, indicate that the company continues to capture strong market share growth in
the category, with little impact from hotel direct booking initiatives or competitive OTA
marketing spend. We expect a strong 1Q, with perhaps a little less upside than usual
due to the late 4Q reporting date.
Looking forward to 2Q, we have our usual caution on guidance as 2Q is the most backend
loaded quarter for bookings and revenues. However, in 2017 the Easter shift is a
positive factor and will help 2Q revenues and earnings. We also expect 1Q bookings and
room night growth upside to translate into higher 2Q gross profit growth, and
management indicated that there is less marketing ROI pressure expected in 1H'17 than
in 2H'16. Overall, we expect Priceline’s strong business trends to continue, and would
use extra conservatism in guidance as a buying opportunity.
Given strong execution and higher exposure to more fragmented International markets,
Priceline remains our top long-term idea in Online travel. However, on a near-term
basis, we think Expedia could see a bigger stock benefit from an acceleration in room
night growth over the summer.
Key theme/metric(s) for 1Q: Room night growth
We expect Priceline to report 26% y/y room night growth (deceleration v. 31% in 4Q),
ahead of the company’s outlook of 20-25% hotel room night growth. Priceline has a
history of guiding 1Q conservatively, looking at Priceline’s historical 1Q results for
Bookings, revenue and EPS vs guidance suggests modest upside to our bookings growth
forecast of 22% and reported 1Q’17 EPS closer to $9.55 (13% upside vs. the midpoint)
vs. our estimate of $9.08 and the Street’s estimate $8.75.
Table 20: 1Q Bookings Growth, Revenue Growth and EPS Guidance vs. Actuals
1Q13 1Q14 1Q15 1Q16 1Q17
Guidance Actual Upside Guidance Actual Upside Guidance Actual Upside Guidance Actual Upside Guidance Actual Upside
Bookings 30-37% 36% No 23-33% 34% Yes 2-9% 12% Yes 12-19% 21% Yes 17-22% ??
International Bookings FX-Neutral 35-42% 43% Yes 25-35% 38% Yes 17-24% 29% Yes N/A N/A N/A
Revenue 17-24% 26% Yes 15-25% 26% Yes 4-11% 12% Yes 9-16% 17% Yes N/A
EPS $4.90-$5.30 $5.76 Yes $6.35-$6.85 $7.81 Yes $7.20-7.75 $8.12 Yes $9.00-9.60 $10.54 Yes $8.25-8.65 ??
Source: BofA Merrill Lynch Global Research estimates, Bloomberg, Priceline
Biggest 1Q issues/risks:
• Concerns on threat of increasing marketing competition with Expedia and
TripAdvisor
• Potential pressure on US inbound traffic given the Trump travel ban (unlikely to
impact Priceline given high Intl exposure)
• Marketing deleverage – our model assumes 340bps of y/y online marketing
deleverage in 1Q
• Pressure on hotel revenue take rates given less hotel participation in commission
programs and longer booking windows
Early 1Q RevPAR data mixed
Priceline’s Booking.com has roughly 1.2mn properties on its site (>611k hotels and 576k
vacation rental properties). According to STR, 1Q US RevPAR through initial March
readings decelerated 30bps to 3.0% y/y, and European RevPAR through February
accelerated 600bps q/q to 3.6% y/y (FX-neutral). The STR data reflects a continued
32 Internet/e-Commerce | 06 April 2017
gradual deceleration in US RevPAR growth and a positive recovery in European RevPAR
growth as the region laps terrorist attacks and geopolitical uncertainty.
Table 21: US and European RevPAR Y/Y Change
US
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17
Mar-
17** 1Q16 2Q16 3Q16 4Q16 1Q17
Occupancy -0.3% -0.8% -0.4% 2.2% -0.5% 0.3% -1.0% -0.4% 1.6% -0.3% 2.5% -0.1% 0.5% -0.5% 1.6% -0.5% 0.7% 0.1% 0.7% 0.5%
ADR 2.8% 3.6% 3.2% 2.8% 2.4% 3.5% 3.6% 2.5% 3.9% 1.9% 3.4% 2.4% 3.2% 1.7% 2.6% 3.2% 2.9% 3.3% 2.6% 2.5%
RevPAR 2.4% 2.8% 2.7% 5.0% 1.9% 3.8% 2.5% 2.1% 5.6% 1.6% 5.9% 2.3% 3.8% 1.2% 4.2% 2.7% 3.6% 3.4% 3.3% 3.0%
Europe
Occupancy 1.4% 1.5% 0.3% 3.5% -0.3% -0.7% -0.4% -1.5% 0.8% -0.4% 4.2% 4.5% 5.1% 2.9% 1.1% 0.8% -0.4% 2.8% 4.0%
ADR -4.3% -2.7% 2.5% 3.2% 0.3% -4.5% -0.7% -4.8% -1.8% -8.6% -5.3% -5.0% -2.1% -3.1% -1.5% -0.3% -2.4% -6.3% -2.6%
RevPAR -2.9% -1.3% 2.8% 6.8% -0.1% -5.1% -1.1% -6.2% -1.0% -9.0% -1.3% -0.7% 2.9% -3.1% -0.5% 0.5% -2.8% -3.7% -0.1%
Europe in Euros Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 1Q16 2Q16 3Q16 4Q16 1Q17
Occupancy 1.4% 1.5% 0.3% 3.5% -0.3% -0.7% -0.4% -1.5% 0.8% -0.4% 4.2% 4.5% 5.1% 2.9% 1.1% 0.8% -0.4% 2.8% 4.0%
ADR 0.0% -0.2% -1.7% -0.1% -0.9% -4.4% -2.7% -4.6% -1.6% -8.5% -5.4% -1.5% -0.9% 0.2% -0.7% -1.8% -3.0% -5.2% -0.4%
RevPAR 1.4% 1.2% -1.4% 3.3% -1.2% -5.0% -3.1% -6.0% -0.9% -8.9% -1.4% 2.9% 4.2% 3.0% 0.4% -1.0% -3.3% -2.4% 3.6%
Source: Smith Travel Research (STR), BofA Merrill Lynch Global Research estimates; Note: **March data is month to date
Estimates vs. Consensus: We are above the Street on EBITDA/EPS in 1Q
Our 1Q revenue/EPS of $2.4bn/$9.08 is broadly in line to slightly above the Street at
$2.4bn/$8.75. We see upside to the company’s 1Q EPS guide of $8.25-$8.65. We
estimate 26% y/y hotel room night growth, some deceleration from 31% growth v. 4Q
(guidance is 20-25%).
Table 22: Priceline Estimate Summary
1Q17 2Q17 2017 2018 2019
Revenue
BofAML est. $2,415 $3,041 $12,518 $14,469 $16,493
Growth Y/Y% 12% 19% 17% 16% 14%
Street $2,441 $2,998 $12,447 $14,323 $16,279
BofAML vs. Street Below Above Above Above Above
EBITDA
BofAML est. $609 $988 $4,784 $5,476 $6,207
Street $599 $966 $4,747 $5,515 $6,310
BofAML vs. Street Above Above Above Below Below
EPS
BofAML est. $9.08 $15.45 $75.35 $87.19 $100.07
Street $8.75 $14.84 $74.11 $86.36 $98.76
BofAML vs. Street Above Above Above Above Above
Source: BofA Merrill Lynch Global Research estimates, Bloomberg, as of 4/4/2017
Our price objective is $1,920 based on 22x our 2018 adj. EPS estimate. The 22x
multiple is towards the upper end of Priceline's historical multiple range of 13-23x and
represents a PEG of 1.4x. We think a 22x forward P/E multiple is appropriate given midteens
EPS growth, strong booking trends, Priceline's leadership position in the global
online travel sector, track record of EPS upside, and increased access to the China via
the Ctrip investment.
Internet/e-Commerce | 06 April 2017 33
Snap (Neutral, $25 PO)
Stock view: Long-term potential, but near-term could be lumpy
Snap will report its first earnings as a public company and expectations have a wide
range. The 2H16 DAU slowdown has raised concerns in terms of both competitive risk
and execution, so user trends could be the most important metric in the quarter. At this
point, it’s difficult to gauge relative impact of Facebook / Instagram competition,
Android technical issues, product cycle lumpiness, and seasonality to the recent
slowdown. Nonetheless, our sense is that DAU expectations are around 164-166mn, and
we’d expect variability (higher or lower) to have a meaningful impact on stock
sentiment.
In terms of the P&L, we expect a slight q/q decline in revenue per normal seasonality
and are modeling down 1% q/q (consistent with comments in the prospectus filing).
While we can appreciate the momentum of the API roll-out with several new
partnerships announced in January, our checks suggest most programs are early stage
with limited volume to date. Considering the rest of the P&L, we expect a fairly messy
quarter between deal costs, the CEO stock award, and a catch-up RSU stock comp
expense. As we do not anticipate non-GAAP profitability until 2H19, we expect
traditional P&L metrics will be less of a focus in the coming quarters.
We recently initiated coverage with a Neutral and $25 price target (please see User
overhang unlikely to be resolved in a Snap – Initiate at Neutral with $25 PO). Social
media sector history suggests a wide range of possible outcomes for Snap and, as such,
near-term lumpiness in metrics could result in high volatility for the stock. We also note
that lock-up overhang could drag on near-term performance into the first lock-up
expiration on 7/29.
Key theme/metric(s) for 1Q: DAUs, ARPU, and competition
We believe the key metric for the quarter will be the DAU number, which we model at
166mn (up 8mn q/q, 36% y/y). We believe DAU headwinds may peak 1H17 as the
company is facing an onslaught of competitive products (see More Stories in the Snap
competitive saga), technical challenges with Android (from Memories), and seasonality
entering the summer. We model ARPU at $1.01 (down 5% q/q), with North America
ARPU at $2.03 (down 7% q/q). We won’t be surprised to see upside in ARPU driven by
ad load growth and higher user engagement, though competitive pricing could
potentially offset.
Biggest 1Q issues/risks:
• DAU deceleration on share loss: Anything short of 164mn will likely be met with
skepticism as investors extrapolate recent trends in considering competitive
resilience vs Instagram, Facebook, and others. Management will likely address the
Android technical issues impact on DAUs.
• Aggressive pricing could drive short term growth but have mixed perception:
Twitter noted elevated competition and potentially aggressive pricing surfacing in
mid-January, which aligns well with Snap’s API update.
• Lack of visibility into pipeline: While we don’t necessarily expect new product
announcements, lack of color/visibility on the product pipeline could disappoint.
• Results could leave investors looking for more disclosure: We are not sure what
disclosure Snap will provide on results, and important trending info (like average
minutes per user) could be lacking.
Top 1Q data points: comScore suggests some gains for Instagram
While comScore data is not consistent with reported minutes, it is useful for relative
comparisons. The data puts Snapchat minutes per user well above Twitter, but still
34 Internet/e-Commerce | 06 April 2017
trailing Instagram and Facebook. Interestingly, after Snapchat passed Instagram in early
2016 in average minutes per user, Instagram recaptured the lead mid-year and has
extended it since. While the cause for the shift is not certain, the trends align with the
launch of Instagram Stories (August 2016) as well as some technology challenges on the
Snapchat front (Android). Regardless of the near-term lumpiness, we believe overall
daily engagement puts Snapchat in a strong position to capture emerging online
marketing ad budgets.
Table 23: Average minutes per user trend
Aug-2016 Sep-2016 Oct-2016 Nov-2016 Dec-2016 Jan-2017 Feb-2017
Snapchat 267 267 272 269 271 254 211
Instagram 292 294 325 337 322 357 318
Facebook 769 766 855 826 781 827 700
Twitter 143 149 139 114 108 128 110
Source: comScore, BofA Merrill Lynch Global Research
Chart 14: Instagram vs Snapchat average monthly minutes per visitor
400
350
300
250
200
150
100
2/14
4/14
6/14
8/14
10/14
12/14
2/15
4/15
6/15
8/15
10/15
12/15
2/16
4/16
6/16
8/16
10/16
12/16
2/17
Snapchat
Instagram
Source: comScore
Estimates vs Consensus
Our 1Q revenue estimate of $163mn (down 1% q/q) is slightly above consensus at
$158mn (down 5%), but we note the range of estimates is considerable ($130-196mn)
and some checks suggest that Snap was aggressive with advertisers in 1Q. For the
year, our $1.0bn revenue estimate is mostly in-line with the Street, as is our 2018
estimate at $2.1bn. We do not model positive adjusted EBITDA until 2Q19, and expect
investors to focus mostly on user revenue trends.
Table 24: Snap Estimate Summary
1Q17 2Q17 2017 2018 2019
Revenue
BofA ML est. $163 $208 $1,007 $2,057 $3,719
Growth Y/Y% 320% 190% 149% 104% 81%
Street $158 $206 $1,034 $2,032 $3,303
BofA ML vs Street Above Above Below Above Above
EBITDA
BofA ML est. -$168 -$158 -$580 -$335 $276
Street -$180 -$194 -$617 -$392 $80
BofA ML vs Street Above Above Above Above Above
EPS
BofA ML est. -$0.18 -$0.15 -$0.59 -$0.37 $0.12
Street -$0.21 -$0.13 -$0.57 -$0.33 $0.00
BofA ML vs Street Above Below Below Below Above
Source: BofA Merrill Lynch Global Research estimates, Bloomberg, as of 4/4/2017
Internet/e-Commerce | 06 April 2017 35
Our $25 PO is based on our DCF model as we do not expect the company to be
profitable until mid- to late-2019 and any earnings-based valuation exercise would
require discounting back future earnings. Our DCF assumes approximately $28bn
revenue by 2027 based on 525mn DAUs and $50+ in ARPU. Our PO implies 15.5x EV /
Revenue, above the peer group at 4x, as we believe Snap's early stage of ad
monetization and potential future leverage in the business model warrants a premium
valuation multiple to the social media group.
36 Internet/e-Commerce | 06 April 2017
TripAdvisor (Underperform, $40 PO)
Stock view: EBITDA under pressure, brand ad spend not in Street estimates yet
2016 was a re-platforming year, and with Instant Book fully rolled out globally, the
company aims to re-educate visitors on its booking offering. However, we think most
TripAdvisor visitors (399mn average monthly unique visitors in 2017 and 148mn
average monthly hotel shoppers) still view the site as a review/research portal, and
changing customer behavior will be quite difficult, particularly as we do not think
TripAdvisor has clarified its value proposition for shoppers.
While we think that TripAdvisor’s elevated marketing spend in 2017 will drive a rebound
in traffic, we anticipate a poor ROI. Marketing expense continues to ramp as Instant
Book rolls out, though traffic growth slows, implying more costly traffic acquisition. In
4Q’16, Sales & Marketing as a % of sales increased to 52.8% vs. 45.6% in 4Q’15, and
we think TripAdvisor essentially bought desktop Hotel Shopper traffic, though likely at
poor ROI. However, higher marketing spend in 2017 does not yet include potential for a
likely return to expensive brand ad campaigns. In our brand ad spend scenario analysis,
we expect still more downside to estimates (see Taking a look at TripAdvisor’s potential
brand ad spend).
The company is encouraged by Revenue per Hotel Shopper growth continuing to
improve from down 21% y/y in 1Q. We expect growth continues its improvement trend
in 2017. However, if monetization trends decelerate, earnings downside could be
significant. We think it will be difficult for TripAdvisor’s Hotel revenue to return to
growth next year, let alone double-digit y/y growth, given the mobile monetization
headwinds. However, if the company invests heavily in traffic acquisition, particularly on
higher monetizing desktop, revenue and traffic growth may reaccelerate meaningfully in
2017, though with ongoing pressure on margins.
Chart 15: Quarterly revenue and Sales & Marketing per Hotel Shopper y/y growth
Y/Y Growth
40%
30%
20%
10%
0%
-10%
-20%
-30%
Revenue per Hotel Shopper
S&M per Hotel Shopper
Source: BofA Merrill Lynch Global Research estimates, company report
Key theme/metric(s) for 1Q: Update on ad spend targets, 2017 guidance
TRIP’s outlook for 2017 is based on “prioritizing revenue growth as opposed to profit
growth,” which implies far lower marketing return expectations. However, TRIP notes
this expectation for marketing spend does not include potential for a return to brand
marketing, which could be an incremental $50-70mn headwind in ’17, in our view.
Biggest 1Q issues/risks:
• Marketing spend: TripAdvisor has prioritized revenue growth at the expense of
earnings, implying poor marketing ROI. The biggest issue facing TripAdvisor is if it
decides to pursue an expensive brand/TV marketing campaign which would further
drive further earnings downside.
Internet/e-Commerce | 06 April 2017 37
• Instant Book impact: The Instant Book transition could impact meta rates and total
monetization as more hotel shoppers flow through large OTA partners.
• Hotel Shopper growth: Given elevated marketing spend, we expect to see a rebound
in hotel shopper and hotel revenue growth. 4Q16 hotel shopper growth accelerated
from 3% in 2Q-3Q16 to 8%. We expect hotel shopper growth to decelerate slightly
to 6% in 1Q17 on a 200bps tougher y/y comp.
1Q traffic data points: comScore indicates solid mobile and PC user growth
In the US, comScore reported quarter to date through February, average monthly unique
visitors of 31mn on PC and 56mn on mobile, up 24% and up 3% y/y, respectively.
TripAdvisor total minutes in 1Q through February is up 10%, with mobile minutes up 5%
and PC minutes up 17%. In our view, TripAdvisor’s elevated marketing spend YTD likely
targets higher monetizing PC traffic.
Estimates vs. Consensus: Broadly in-line on Revenue, below on EBITDA/EPS
Our 1Q revenue estimate of $379mn is broadly in line with the Street at $377mn. We
are more cautious on EBITDA and EPS at $71mn/$0.23 vs. the Street at $76mn/$0.27.
Table 25: TripAdvisor estimate summary
1Q17 2Q17 2017 2018 2019
Revenue
BofAML est. $379 $432 $1,647 $1,794 $1,936
Growth Y/Y% 8% 10% 11% 9% 8%
Street $377 $433 $1,649 $1,852 $2,095
BofAML vs. Street Above Below Below Below Below
EBITDA
BofAML est. $71 $88 $346 $403 $471
Street $76 $88 $339 $392 $530
BofAML vs. Street Below Above Above Above Below
EPS
BofAML est. $0.23 $0.31 $1.22 $1.57 $1.89
Street $0.27 $0.32 $1.23 $1.48 $2.28
BofAML vs. Street Below Below Below Above Below
Source: BofA Merrill Lynch Global Research, Bloomberg, as of 4/4/2017
Our price objective of $40 is based on 25x our 2018 non-GAAP EPS estimate. This
multiple represents a modest premium to the group for possibly depressed margins and
potential for re-accelerating top-line growth.
38 Internet/e-Commerce | 06 April 2017
Trivago (Buy, $15 PO)
Stock view: Advertising continues to drive growth engine
Trivago’s 4Q revenue and EBITDA results highlight the company’s rapid revenue growth
and potential for solid profitability. Though there are concerns over the company’s large
marketing spend (80-85% of revenue), we think the Street will view Trivago’s results
positively given continued revenue ramp while also achieving profitability. The stock
remains highly volatile given the limited float. Commentary during 4Q’16 earnings from
Trivago’s key customers Expedia and Priceline (as well as from TripAdvisor) indicated
that paid traffic has been growing faster than free traffic, and that companies in the
sector planned to ramp ad spend to drive continued traffic growth, which is a positive
for Trivago.
Trivago has best-in-class revenue growth, with 2017 revenue growth expected at 47%
(vs. guidance of 45%+), led by 50% qualified referral growth. We also expect Trivago will
become more efficient with advertising and start to reap the benefits of past brand
advertising, with return on advertising spend (ROAS) improving across regions in 2017,
a key driver of modestly improving EBITDA margin from 3.7% in 2016 to 3.9% in 2017.
The company remains in growth mode, led by click revenue growth in ROW and
Americas regions, as Trivago is driving brand awareness outside its key European
foothold through aggressive brand marketing. The company is adding qualified referrals
at an accelerating rate as it expands beyond its core Developed Europe markets and
penetrates new markets. We think the company has significant runway for growth and
can sustain 30%+ revenue growth through the end of the decade. As the business
matures in its new Americas and ROW markets, we expect a better balance between
profit and growth. We think EBITDA margins should accelerate as the company
leverages ‘16 and ‘17 marketing spend, with greater uplift in ‘18.
Key theme/metric(s) for 1Q: Qualified referral growth
We forecast 56% qualified referral growth in 1Q (920bps deceleration on 730bps
tougher y/y comp), led by 38% y/y growth in Developed Europe, 48% in Americas, and
110% in ROW. We expect continued robust marketing spend will drive user growth.
Biggest 1Q issues/risks:
• Weak return on advertising spend (ROAS) may be an earnings headwind.
Competition in the company’s advertising channels may result in lower ROI trends.
The company may also see less efficient advertising in newer, less mature markets.
• A positive update to 2017 guidance may be expected. Trivago currently expects
total revenue growth of 45%+ and adjusted EBITDA margin is guided to flat to
slightly up vs. 2016’s 3.7%.
Estimates vs. Consensus: Expect revenue in-line vs. the Street, EBITDA ahead
For 1Q, we expect revenue/EBITDA of €241mn/(€12mn) vs. the Street at
€241mn/(€10mn). We expect 2017 and 2018 revenue and EBITDA to come above the
Street and expect there is room for upside to management’s 2017 revenue growth and
EBITDA margin guidance.
Table 26: Trivago Estimate Summary
1Q17 2Q17 2017 2018 2019
Revenue
BofAML est. €241 €281 €1,105 €1,498 €1,984
Growth Y/Y% 52% 57% 47% 36% 32%
Street €241 €270 €1,088 €1,497 €2,035
BofAML est. vs. Street Below Above Above Above Below
EBITDA
BofAML est. €12 €6 €44 €127 €262
Street €10 €6 €40 €98 €197
BofAML est. vs. Street Above Below Above Above Above
EPS
Internet/e-Commerce | 06 April 2017 39
Table 26: Trivago Estimate Summary
1Q17 2Q17 2017 2018 2019
BofAML est. €0.02 €0.00 €0.05 €0.22 €0.48
Street €0.02 €0.01 €0.06 €0.15 €0.32
BofAML est. vs. Street Above Below Below Above Above
Source: BofA Merrill Lynch Global Research estimates, Bloomberg, as of 4/4/2017
Our PO of $15 is based on a 3.5x 2018E EV/Sales multiple. We note that 3.5x is roughly
in line with the lead generation peer group average 2018E EV/Sales multiple. We think
our EV/Sales multiple is warranted as a balance between Trivago's higher growth and
lower profitability. Our price objective is supported by our DCF analysis.
40 Internet/e-Commerce | 06 April 2017
Wayfair (Neutral, $44 PO)
Stock view: Timeline on profitability still an issue, but comps ease in 2Q’17
Wayfair’s two issues have been deceleration in U.S. revenue growth and negative
operating margins as the company continues to aggressively invest in logistics,
international expansion, marketing, and new categories. 1Q customer and order growth
comps remain tough, which was one of the drivers of revenue growth guidance below
expectations. Wayfair also attributed weak guidance to caution on the retail
environment and added investment. Growth comps ease in 2Q/3Q, and there is potential
for more stable growth in 2Q guidance to drive improving investor sentiment.
As for margins, management guided to EBITDA margin of (3.5%)-(3.8%), a deceleration
from (2.8%) in 1Q’16 due to a lower opex absorption in the quarter on seasonally lower
sales. The US is expected to swing back to EBITDA losses in 1Q’17, while Intl losses are
expected to remain steady. We forecast EBITDA margin of (2.4%), with (0.2%) EBITDA
margin in the US and (19.0%) margin in International. The company continues to expect
little to no ad spend leverage given increase International ad spend.
Management historically builds conservativism into its guidance and, until last year, had
a track record of beating the upper end of its sales outlook by ~10%. Recently, revenue
has been by a low-single digit percentage. Our above consensus 1Q revenue forecast
implies 1% upside to the high end of the guidance range, in line with the trend over the
past 3 quarters. We think investors expect sales growth above the guidance range as
well.
Table 27: Revenue and EBITDA Guidance vs. Actuals
4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17E**
Revenue - High End of Guidance $370,000 $390,000 $440,000 $525,000 $665,000 $700,000 $785,000 $850,000 $960,000 $930,000
Revenue Actual $408,619 $424,371 $491,752 $593,972 739,790 747,348 786,928 861,525 984,559 943,626**
Revenue Upside $38,619 $34,371 $51,752 $68,972 $74,790 $47,348 $1,928 $11,525 $24,559 $13,626
Revenue % Upside 10% 9% 12% 13% 11% 7% 0% 1% 3% 1%
EBITDA - High End of Guidance % -4.5% -3.5% -2.5% -0.8% -0.8% -3.0% -3.2% -4.3% -2.8% -3.5%
EBITDA - High End of Guidance ($16,650) ($13,650) ($11,000) ($3,938) ($4,988) ($21,000) ($25,120) ($36,125) ($26,400) ($32,550)
EBITDA Actual ($7,218) ($12,340) ($4,972) ($1,445) $2,828 ($20,960) ($24,857) ($30,849) ($12,026) ($22,463)**
EBITDA Upside $9,432 $1,310 $6,028 $2,493 $7,816 $40 $263 $5,276 $14,374 $10,087
Source: BofA Merrill Lynch Global Research, Wayfair
Note: * 1Q17E Actuals are current BofA Merrill Lynch forecasts
Over the past two quarters, Wayfair has expressed caution on the macro environment,
though this proved to be somewhat unwarranted in 4Q. According to February 2017
aggregated BAC credit and debit card data, furniture sales were up 1.3% (down 0.4% on
rolling 3-month m/m basis), while home goods were down 1.2% y/y and flat on a rolling
3 month m/m basis. Please see the BofA Merrill Lynch US Economics team's report for
additional commentary on broader retail trends and a detailed explanation of the
methodology and limitations in connection with BAC data. Williams-Sonoma reported
disappointing 4Q earnings (March 15 th report) and provided modest 1Q guidance that
the BofA Merrill Lynch Hardline Retail team called “a little rich,” though it is difficult to
tell if weak trends are the result of secular home goods weakness or the disruptive
impact of eCommerce players like Wayfair.
Key theme/metric(s) for 1Q: 2Q revenue guidance on easier y/y comps
1Q revenue guidance was a disappointment, though comps ease in 2Q’17, and
opportunity for more stable US growth could aid stock sentiment. Customer growth in
2Q has a 400bps easier y/y comp vs 1Q17, while order growth has a 1700bps easier y/y
comp. Overall, revenue growth faces a 1600bps easier y/y comp. and would expect
guidance anywhere near the Street’s 2Q estimate at 25% y/y growth to be viewed
positively given several quarters of guidance below street estimates.
Internet/e-Commerce | 06 April 2017 41
Biggest 1Q issues/risks:
• Commentary on US customer trends, particularly repeat rates and unit economics
(customer acquisition costs).
• AOV trends given street concerns that some customer metrics are benefitting from
purchase of lower value items.
• Progress with International investments, especially early results from ad spending in
UK, Canada, and Germany.
1Q data points indicate mixed traffic trends
US data indicates that Wayfair PC minutes growth increased 17% y/y in 1Q through
February vs. 14% y/y growth in 4Q’16. Wayfair mobile minutes have decreased 24% y/y
through February in 1Q vs. up 3% y/y in 4Q’16. US PC user growth decreased 16% y/y in
1Q through February, vs. 4Q at -25% y/y. Wayfair mobile user growth increased 2% y/y
in 1Q through February vs. 16% y/y in 4Q.
Estimates vs. Consensus: Expect revenue and EPS upside vs. the Street
For 1Q, we expect revenue/EBITDA of $944mn/($22mn) vs. the Street at
$933mn/($32mn). Total revenue guidance of $905-930mn implies 2-year stacked
growth of 97-101% vs. 121% in 2016, which seems conservative. We expect the
company’s revenue to come in above the high end of the sales outlook as Direct
Revenue sales were up 30% quarter to date (through nearly 2 months of 1Q’17). Our
1Q revenue growth forecast is based on 48% y/y customer growth (up 9% q/q) and 42%
order growth (down 10% q/q). Wayfair expects EBITDA margin of (3.5%)-(3.8%) due to a
lower opex absorption in the quarter on seasonally lower sales. The company continues
to expect little to no ad spend leverage given increase International ad spend.
Table 28: Wayfair Estimate Summary
1Q17 2Q17 2017 2018 2019
Revenue
BofAML est. $944 $980 $4,169 $5,019 $5,872
Growth Y/Y% 26% 25% 23% 20% 17%
Street $933 $987 $4,237 $5,258 $6,585
BofAML vs. Street Above Below Below Below Below
EBITDA
BofAML est. -$22 -$19 -$48 $10 $64
Street -$32 -$20 -$59 $23 $134
BofAML vs. Street Above Above Above Below Below
EPS
BofAML est. ($0.49) ($0.46) ($1.55) ($1.00) ($0.47)
Street ($0.60) ($0.45) ($1.65) ($0.94) $0.04
BofAML vs. Street Above Below Above Below Below
Source: BofA Merrill Lynch Global Research estimates, Bloomberg, as of 4/4/2017
Our PO of $44 is based on 0.7x 2018E EV/sales. We continue to focus on EV/Sales given
Wayfair’s lack of profitability due to US fulfilment investment and Intl. expansion. Our
0.7x target multiple is a discount to Wayfair’s eCommerce comp group at 1.3x and at a
modest discount to a retail peer comp group at 0.8x. We think the multiple is
appropriate given strong revenue growth vs. peers, balanced by lower profitability.
42 Internet/e-Commerce | 06 April 2017
Twitter (Underperform, $14.50)
Stock view: Engagement could be improving, but still trailing peers
On positive note, DAU growth, tweet impressions, and time spent growth have all been
accelerating, and we won’t be surprised if most metrics show stable growth in 1Q17
given event activity (political, sports, awards shows) in 1Q. However, the NFL season is
over, the election surprise is slowing fading, competitive pressure is rising (particularly
Instagram), and new monetization initiatives will take time, so we are more cautious on
2Q. The high level of executive churn also raises an element of strategic uncertainty
that could continue to weigh on sentiment. While it’s possible Twitter could see
moderate residual benefit from recent YouTube/Google Display Network boycotts, we
continue to believe MAU growth acceleration is key to improving sentiment, and we
continue to expect other platforms to grow much faster. The biggest upside driver for
1Q could be conservative guidance, which implied revenues would be down 17% y/y at
the midpoint in 1Q.
Longer-term, our primary concerns are user growth, rising competition in video, and lack
of positive advertiser feedback. Despite execution on the live streaming initiative in
2016, MAU impact was underwhelming and we see risk of rising costs and/or content
loss in 2017. At this point, it’s unclear how aggressively management will push live
streaming in 2017, and early exploration of potential subscription revenue streams
(enhanced Tweetdeck offering beta) could suggest potential strategic shifts. On the
advertiser side, we are still hearing limited traction with Twitter’s ad platform changes
and ROI measurement, and it seems experimental dollars are being moved to Snap.
The biggest risk to our Underperform rating, in our view, is the underlying value of the
Twitter platform for users and potential Artificial Intelligence (AI) signals. We remain on
the sideline for now, with ever-present M&A potential providing some element of a floor
to the stock. We think 3x 2017 revenues plus cash ($12/share in total) is a valuation an
acquirer could see as very reasonable given stabilizing DAU trends and value of Twitter
data.
Key theme/metric(s) for 1Q: Mgmt focus on engagement, investors on users
MAU growth likely remains the primary focus in terms of metrics investors consider.
While DAU growth could continue to growth at high single digits, we do not see much
upside potential to low single digit MAU growth (we model 322mn, 4% y/y), which lags
in comparison to Facebook’s recent17% y/y growth. We expect engagement metrics in
general (tweet impressions, DAU growth, time spent) to be solid, though it’s possible
lack of NFL and fading US election catalysts could have some negative effect. In terms
of monetization, our ARPU estimate for $1.67 implies a 14% y/y decline, which reflects
both weaker Twitter pricing trends and potential competitive pricing pressures.
Biggest 1Q issues/risks:
• MAU growth could slip: We model 4% y/y MAU growth to 322mn, but fading NFL
and election tailwinds could lead to weaker user growth trends in 2Q.
• Competition could impact pricing: Management noted elevated competition in
mid-January (shortly after Snap’s ad API update), which may have continued
throughout the quarter and impacted pricing more than anticipated.
• Live streaming pipeline in question: Amazon recently announced a deal with the
NFL to steam game content, replacing Twitter.
• Ad product wind-down could impact revenue: Management indicated that it is
reevaluating lower return ad formats, and a decision to wind down certain formats
(like direct response, promoted tweets) could further impact 2Q guidance.
Internet/e-Commerce | 06 April 2017 43
Top 1Q data points
comScore mobile data indicated US monthly active users were up 2% y/y and down 4%
q/q (down 3mn q/q), versus our estimate for +4% y/y, +1% q/q. Total minutes for 1Q17
(2-mo. data) are tracking down 18% y/y, with mobile down 18% and desktop down 23%.
Mobile minutes have averaged a 20% y/y decline for the last 4 months.
Estimates vs Consensus
Our 1Q17 rev/EPS estimates for $535mn/$0.03 are slightly above the Street and above
the implied midpoint of management’s guidance (based on EBITDA and EBITDA margin
outlook). Despite our near-term concerns, we believe the outlook was sufficiently
conservative. That said, we see risk to current consensus estimates for the year, and we
are below Street revenue at $2.3bn for 2017 vs consensus at $2.35bn, though slightly
ahead on EBITDA on more moderate cost assumptions. Our 2017 estimates assume a
conservative 4% MAU growth for the year.
Table 29: Twitter Estimate Summary
1Q17 2Q17 2017 2018
Revenue
BofA ML est. $535 $544 $2,301 $2,339
Growth Y/Y% -10% -10% -9% 2%
Street $510 $548 $2,352 $2,496
BofA ML vs Street Above Below Below Below
EBITDA
BofA ML est. $120 $152 $639 $689
Street $94 $135 $564 $650
BofA ML vs Street Above Above Above Above
EPS
BofA ML est. $0.03 $0.08 $0.33 $0.34
Street $0.01 $0.06 $0.27 $0.37
BofA ML vs Street Above Above Above Below
Source: BofA Merrill Lynch Global Research, Bloomberg, as of 4/4/2017
Our $14.50 price objective is based on 12x our 2018 EBITDA estimate, which reflects a
discount to the online media group (13x). We believe the Twitter platform has slowing
user and revenue growth and as such, we expect the stock to trade at a sustained
discount to online media peers, with potential M&A adding some offsetting downside
support.
44 Internet/e-Commerce | 06 April 2017
Yelp (Neutral, $43 PO)
Stock view: Likely to be some improvement vs last quarter
Yelp is coming off of a quarter with decelerating app unique devices, weak new
customer adds, and decelerating sales force growth, and it seems likely that one or two
of these metrics will improve. The tone at our recent investor meetings with the CFO
seem to suggest that 4Q issues did not signal a break in the model (see On the road
with Yelp), and we expect an improvement q/q customer adds. We think the company
should be able achieve Street 1Q revenue and EBITDA estimates, though we won’t be
surprised to see the 2Q17 outlook come in slightly below current Street estimates.
For the full year outlook, while we believe the implied expense growth in the 2017
outlook is somewhat conservative, management appears focused on investing in the
business for now and we think upside is more likely to come in 2Q or 3Q. Overall, we
remain somewhat cautious on the stock given potential revenue deceleration due to
tough comps and a deceleration in sales force growth.
On the cost front, management has been clear in its intention to invest in performance
marketing, which could take time to bear fruit. In addition, we believe sales force growth
to stabilize/increase going forward, which would seem to suggest potential cost
headwinds relative to recent quarters. Finally, while we don’t have the specific
financials, the addition of Nowait ($40mn acquisition closed 2/28) likely encompasses a
moderate bump up in opex with limited revenue to offset.
As we look ahead, we are encouraged with the three transitions within company and we
will be looking for progress on the following on the call. The first is connections
between consumers and businesses on Yelp through clicks, reservation services,
ordering, and Request a Quote. The second is a ramp up in performance marketing as
users engage in more measurable events. The third is new customer acquisition via
alternative channels, including national customers from outside sales alongside selfserve
customers via online channels.
Key theme/metric(s) for 1Q: new account adds, app unique devices growth
Given the miss last quarter and pressure on sales force headcount, local advertising
accounts will be important gauge of overall execution. Other key metrics include app
unique devices growth, which has been decelerating since mid-2015 from 51% y/y to
20% in 4Q16. Performance marketing could reverse the trend, but it could take some
time. Finally, while management continues to highlight a decoupling of sales force
growth and topline trends, investors still pay attention to overall sales force growth,
particularly given the three consecutive quarters of deceleration from 44% y/y (1Q16) to
11% y/y (4Q17). Management has indicated that sales force growth in 2017 should be
in the double digits.
Table 30: Key 1Q metrics
Metrics 4Q16A 1Q17E 2Q17E
Claimed Local Business 3,363 3,552 3,727
y/y Growth 27% 25% 24%
Local Advertising Accounts 138 142 150
y/y Growth 24% 17% 17%
Reviews 121,022 127,135 133,635
y/y Growth 27% 25% 23%
Source: BofA Merrill Lynch Global Research, company reports
Biggest 1Q issues/risks:
• Local revenue deceleration: We assume 750bps of y/y growth deceleration in
1Q17 vs 4Q16.
Internet/e-Commerce | 06 April 2017 45
• Metrics could remain under pressure: Investors likely will look for stabilization in
key metrics such as app unique devices growth and local ad account growth, but it
could take time for incremental marketing and sales investments to bear fruit.
• Stock comp could create overhang: With Alphabet’s decision to only report GAAP
profits, Yelp’s high stock comp (67% of 2017E EBITDA) could create overhang to
the valuation.
Leading indicator data points:
Salesforce growth decelerating
While it possible that Yelp sees improving productivity per salesperson, and the mix shift
to national and self-serve reduces reliance on direct sales, the deceleration in salesforce
headcount is a negative leading indicator for revenues.
Chart 16: Salesforce growth versus local advertising revenue growth
80%
70%
60%
50%
40%
30%
20%
10%
0%
1Q14A
2Q14A
3Q14A
4Q14A
1Q15A
2Q15A
3Q15A
4Q15A
1Q16A
2Q16A
3Q16A
4Q16
1Q17E
2Q17E
3Q17E
Salesforce y/y % Salesforce y/y % ( 2-qtr shift) Local ad rev y/y %
Source: Company, BofA Merrill Lynch Global Research
Accrued sales bonus and commissions tracking lower
We note that 4Q accrued bonuses and commissions are down y/y and reflect only 0.3%
of NTM revenue, which would be the lowest ratio seen in recent years. Even on an
absolute basis, the total accrued bonuses and commissions of $3.1mn is the lowest
since mid-2013. While this is likely due in part to gains in self-serve and perhaps
increased sales focus on National accounts, the change is noteworthy, in our view.
Chart 17: Accrued bonuses and commissions as a % of NTM revenue
1.2%
1.0%
0.8%
3-year avg: 0.76
0.6%
0.4%
0.2%
0.0%
Source: Company, BofA Merrill Lynch Global Research
46 Internet/e-Commerce | 06 April 2017
In addition, the y/y change in commissions expense disclosed in company filings
continued a downward trend to negative territory. Over the course of 2016, the number
has gone from +$5.7mn in 1Q16, to +$2.4mn in 2Q16, to +$1.4mn in 3Q16, to down
$1.7mn in 4Q16.
We also consider comScore mobile data, which indicated that US monthly active users
were up 2% y/y (2-months data) while desktop monthly active users were down 14%
y/y. This reflects a moderate deceleration in mobile from 4Q (+4%) and slightly lower
declines in desktop (4Q at -16%). Total QTD US minutes are down 6% y/y for mobile (vs
+4% in 4Q), though App minutes were flat, and desktop was up 6% y/y (vs +1% in 4Q).
The somewhat weaker mobile minutes trend is notable, particularly the lack of growth in
Estimates vs Consensus
Our revenue and EBITDA estimates are slightly above consensus for both 1Q17 and
2Q17, as well as for 2017 and 2018. We expect local ad revenue to grow 28% y/y in 1Q
(vs 36% in 4Q) and transaction revenue to grow 17.5% (vs 19% in 4Q). Our 2017
estimates are near the high end of management’s 2017 outlook, and we would expect
any upside potential to likely surface in the latter half of the year.
Table 31: Yelp Estimate Summary
1Q17 2Q17 2017 2018
Revenue
BofAML est. $201 $218 $895 $1,082
Growth Y/Y% 26% 26% 26% 21%
Street $198 $215 $889 $1,068
BofAML vs. Street Above Above Above Above
EBITDA
BofAML est. $31 $40 $166 $221
Street $27 $37 $161 $217
BofAML vs. Street Above Above Above Above
EPS
BofAML est. $0.18 $0.24 $0.99 $1.28
Street $0.16 $0.25 $1.04 $1.45
BofAML vs. Street Above Below Below Below
Source: BofA Merrill Lynch Global Research, Bloomberg, as of 4/4/2017
We are more constructive on the stock given more negative sentiment and recent selloff,
but maintain our Neutral rating given the decelerating sales leading indicator
metrics and tougher revenue comps. Our $43 price objective is based on 14x 2018E
EV/EBITDA, slightly above online media comps, which we believe is warranted given the
higher margin potential in the model. We believe our multiple balances premium growth
vs peers with medium-term concerns on competition and limited GAAP profitability. We
believe the slight premium valuation is sustainable if the company can continue to
deliver 20%+ y/y topline growth, which would be above the advertising industry.
Internet/e-Commerce | 06 April 2017 47
Zillow (Buy, $42 PO)
Stock view: controversy sounding the mortgage business
While we still expect Zillow’s core business to have a solid quarter on product
improvements, the self-serve platform, and its recent Seller Boost product, the
controversy surrounding Zillow’s mortgage business (which potentially has implications
for Zillow’s core business and the retail estate industry) has been a key recent driver of
the stock. The Consumer Financial Protection Bureau (CFPB) has indicated that it views
Zillow’s mortgage referral system as potentially violating parts of the Real Estate
Settlement Procedures Act (RESPA). RESPA (Real Estate Settlement Procedures Act) is
an act designed to product potential homeowners by outlawing kickback and referral
fees from real estate services, particularly in relation to mortgage brokers who often
receive referrals from real estate agents. Since Zillow’s mortgage referrals involve a
pre-application and a referral directly to a mortgage agent that than a larger entity like a
bank, this could be violating the act. Mortgage brokers often fund some of the real
estate agents online advertising expenses and a crackdown on mortgage agents could
potentially hurt real estate agents ability to spend dollars on Zillow.
For now it is too early to say how this will develop as there are conflicting views for and
against this view with the CFPB not releasing an official stance, but we expect this to be
a near term overhang on the stock until a clear view of the CFPB’s view and intentions
unfold. While a contentious issue, mortgage revenue is still only 8% of total revenue
and even a cut back would have a minimal impact to overall revenue growth. As for the
impact on real estate agent spend on Zillow, we believe at with only roughly 5%
penetration into real estate agents online spend Zillow has plenty of room to grow the
core business and the high ROI of the ad unit will ensure agents buy placements on
Zillow regardless of mortgage broker involvement and continue to like the stock.
Key theme/metric(s) for 1Q: Mortgage requests and revenue per loan
With the controversy surrounding the mortgage business, we think investors will be
extra focused on the mortgage unit and focus on the mortgage revenue per loan request
and consumer load requests. Zillow will be releasing new metrics this quarter to replace
ARPA and premier agent count, but has yet to indicate what those metrics will be. Key
topics for the call will likely include: 1) mortgage business outlook; 2) premier agent
advertising spend; 3) rentals business; and 4) progress on FY17 goals.
Biggest 1Q issues/risks:
• If the CFPB decides Zillow violates RESPA, Zillow could face fines and have to
retool its mortgage platform.
• New metrics for FY17 could give less visibility into the business as a whole.
• Slower than expected penetration of self-service platform leading to increased
S&M costs.
• Potential for a weak 2Q guide if mortgage issues overhang the business as a whole.
Top 1Q traffic data points: comScore suggests usage up in 1Q
comScore desktop data suggests that unique visitors were down 5% quarter to date
(Jan. and Feb.) while usage was up 2% QTD. However, on mobile, comScore data
suggests usage is up 14% y/y on a bigger unique visitor base to 62mn unique users and
usage was up 7%. We note comScore has made several methodology changes which
has impacted the consistency of recent months data.
Estimates vs. Consensus: We are above the Street
Over rev/EBITDA estimates of $239mn/$40mn is above the Street at $236mn/$39mn.
We estimate that ARPA will be up 29% y/y to $629 and premier agent subscribers will
be flat y/y at 91.9K. Overall, we estimate 28% y/y growth, but note that the mortgage
issues could potentially impact revenue. For rentals and other we estimate $32mn in
revenue, up 75% y/y.
48 Internet/e-Commerce | 06 April 2017
Table 32: Zillow estimate summary
1Q17 2Q17 2017 2018
Revenue
BofAML est. $239 $261 $1,062 $1,307
Growth Y/Y% 25% 23%
Street $236 $257 $1,048 $1,258
BofAML vs. Street Above Above Above Above
EBITDA
BofAML est. $40 $51 $215 $313
Street $39 $46 $211 $298
BofAML vs. Street Above Above Above Above
EPS
BofAML est. $0.06 $0.11 $0.48 $0.89
Street $0.05 $0.07 $0.44 $0.80
BofAML vs. Street Above Above Above Above
Source: BofA Merrill Lynch Global Research estimates
Zillow has effectively captured the online U.S. real estate market, allowing them to
accelerate monetization and access to a large TAM with $87bn in total real estate
commissions paid in 2016 and Zillow powering just 5% of the commissions through its
Premier Agent platform. Although there is potential for the mortgage business to
create a headwind if the CFPB issued a negative ruling against Zillow, we still like the
stock into the quarter, as we prefer business with minimal competition, and believe that
the high ROI of the real estate premium platform to real estate agents will ensure
agents buy placements on Zillow regardless of mortgage broker involvement. We
maintain our $42 PO based on a 6x our 2018E EV/Sales and supported by our DCF
valuation. Our multiple is roughly in-line for online real estate lead generation sites in
other countries operating in developed countries.
Internet/e-Commerce | 06 April 2017 49
Zynga (Underperform, $2.70)
Stock view: Live events can improve franchises, but still need new titles
Zynga launched Dawn of Titans end of 4Q, and although it progressed into the top 20
grossing games in the U.S. Apple store, it has fallen out of the top 100 at some points
during the quarter suggesting that its overall revenue contribution has been fairly low.
While this is somewhat disappointing, we think investor expectations for the game are
now at reasonable (lower) levels.
Instead of big new title launches, Zynga has indicated it is focused on strengthening its
current franchises with better engagement and monetization through live events and
new features, and progress in this area is key for the 2017 stock outlook. Zynga Poker
(up roughly 80% y/y YTD) appears to be benefiting from the focus on engagement and
live events with much stronger monetization, which could offset declines in other titles.
Overall, we think it could be hard to get the Street excited on the stock without a strong
future title that could drive more than single digit growth.
Key theme/metric(s): DAUs, and live events impact on DAU trends
After launching 10 new games in 2016, Zynga is focusing more heavily on live events to
drive engagement with in franchises rather than launching additional titles. This should,
if successful, translate into better DAU metrics as consumer engage with a title more
often. With Dawn of Titan likely coming below Street expectations, stronger
engagement will be necessarily for Zynga to drive a stronger DAU base. For the quarter,
we model 17.9mn online game DAUs for 1Q, down slightly q/q, and down 6% y/y.
Biggest issues/risks:
• Dawn of Titans revenues: Zynga spend several years developing the game and lack
of title success could impact sentiment.
• Expense leverage and cost-cutting benefits do not materialize: Zynga plans to
further improve operational efficiency and potentially cut non-profitable franchises,
but this may be hard to do without impacting long term growth opportunities.
• Lack of new releases: Zynga gave no indication of when it will release its next
title leaving current franchises to carry revenue and earnings.
Top data points: Zynga game bookings tracking in-line to slightly below est.
Zynga’s largest revenue generating franchises, Zynga Poker was up significantly in 1Q.
Zynga Poker appears to be benefiting from live events and is tracking up roughly 89%
QTD. Combined slots titles appear a bit more challenged with total revenue down 30%
QTD y/y, in part due to lower monetization on Wizard of Oz slots which is tracking down
in gross gaming rankings. Overall, QTD (January and February) Zynga online game
bookings (ex-ad revenue) is tracking up 7% y/y vs our 1Q est. of bookings up 9% y/y.
Chart 18: Zynga Poker y/y revenue growth
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: Superdata Research, BofA Merrill Lynch Global Research
Chart 19: Zynga slots y/y revenue growth
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
Source: BofA Merrill Lynch Global Research estimates, company report
50 Internet/e-Commerce | 06 April 2017
Estimates vs. Consensus: Mostly inline to the Street
We are slightly above the street on revenue at $189mn vs. $188mn, but in-line on
EBITDA at $20mn. Cost cutting could improve EBITDA and Zynga has restructured some
of its workforce and is focusing on driving more engagement with live events in its
game franchises. For 2017, we are below the Street on revenue at $779mn vs. $805mn,
but above on EBITDA at $101mn vs $99mn.
Table 33: Zynga Estimate Summary
1Q17 2Q17 2017 2018
Revenue
BofA ML est. $189 $196 $779 $786
Growth Y/Y% 41% 41% 5% 1%
Street
BofA ML vs Street
$188
Above
$200
Below
$805
Below
$875
Below
EBITDA
BofA ML est.
Street
$20
$20
$20
$24
$101
$99
$106
$122
BofA ML vs Street Above Below Above Below
EPS
BofA ML est. $0.01 $0.01 $0.05 $0.06
Street $0.02 $0.02 $0.07 $0.08
BofA ML vs Street Below Below Below Below
Source: BofA Merrill Lynch Global Research estimates, company report
Zynga is improving profitability while engaging players better with live services but we
remain cautious on the company’s ability to materially grow its audience and still favor
the console gaming group. Zynga should have downside support given roughly $1.50 in
cash and assets and strategic franchise value (we estimate Poker/Slots generates over
$250mn+ in revenue annually). Our $2.70 PO is based on 11x 2018E EBITDA (which is a
premium to the Mobile gaming peer group due to margin expansion potential), plus
$1.41/share in cash and assets (building).
Internet/e-Commerce | 06 April 2017 51
Company referenced Ticker Price
Alphabet A GOOGL 848.91
Alphabet C GOOG 831.41
Amazon.com AMZN 909.28
Bankrate RATE 9.75
Care.com CRCM 11.68
eBay EBAY 33.81
Expedia EXPE 124.97
Facebook FB 141.85
Fitbit FIT 5.71
GrubHub GRUB 33.27
LendingTree TREE 117.8
Match Group MTCH 16.45
Netflix nflx 143.62
ONDK ONDK 4.62
Pandora P 11.82
priceline.com PCLN 1761.77
Quotient QUOT 9.4
Snap SNAP 20.7
TripAdvisor TRIP 41.76
Trivago TRVG 12.81
Twitter TWTR 14.53
Wayfair W 40.21
Yahoo! YHOO 46.38
Yelp YELP 33.22
Zillow A ZG 33.49
Zillow C Z 33.47
ZYNGA ZNGA 2.78
Source: BofA Merrill Lynch Global Research, Prices as of 5 April 2017
52 Internet/e-Commerce | 06 April 2017
Price objective basis & risk
Alphabet (GOOGL / GOOG)
Our price objective is $1025/$1025, representing 17x our core 2018 Google non-GAAP
EPS estimate (excluding non-Google losses), plus $118/share in cash, or 21x core
Google GAAP EPS plus cash. Alphabet has traded at 12-24x forward P/E over the last
five years and we think our 17x multiple is reasonable given shareholder friendly actions
that include the non-core revenue and operating loss disclosures, and stock buybacks.
Downside risks to our PO are: 1) Search revenue growth decelerates faster than
anticipated due to market maturity, 2) mobile transition drives negative search behavior
changes, 3) revenue growth pressure from competitor initiatives, 4) margins disappoint
due to revenue mix and investment initiatives, and 5) negative regulatory changes,
including EU antitrust. The stock has been subject to heavy volatility in the past based
on revenue growth and margin trends and this volatility could increase if economic
conditions deteriorate.
Amazon.com (AMZN)
Our PO of $1,100 is based on our SOP that values AWS at $127bn or $259 per share
and the retail business at $413bn or $841 per share. Our 5.5x AWS multiple is a modest
premium to the software/SaaS comp group at 5.0x on 2018 sales, and 0.9x multiple is a
premium to a retail general merchandise comp group at 0.7x. We think the premiums are
warranted given share gains and superior growth. Our $1,100 price objective implies
2.8x 2018E Price/Sales, a multiple above the high end of Amazon's historical range of
1.0-2.5x. We argue the historical P/S multiple should increase given positive 3rd party
sales (3P) that is reported on a net basis, a higher AWS revenue contribution, and record
gross profit margins.
Downside risks to our price objective are a consumer spending slowdown, rich P/E
multiple, margin or growth pressure from the digitization of media, more aggressive
offline competition, hardware strategy, AWS investments and/or price cuts, Prime
Instant Video content costs, and decelerating growth. The stock has been subject to
heavy volatility in the past, based on margin trends, and this volatility could increase due
to economic uncertainty.
Bankrate (RATE)
Our $13 price objective is based on 9x our 2018E EV/EBITDA, a slight discount to the
online lead-gen and marketplace peer group average of 11x. We believe it is reasonable
for RATE to trade at a slight discount given RATE's recent challenges to both growth
and margins and its position as a turnaround in the space.
Downside risks to our PO are: 1) limited visibility into intra-quarter trends, 2) stock
dependent on economic outlook, 3) card issuer spending is volatile and the turnaround is
short lived, 4) slower growth in personal loans than expected, 5) higher than expected
marketing spending to drive traffic to Bankrate sites, resulting in lower margins, 6)
Google changes have a negative impact on marketing margins and EPS, 7) competition
with other consumer finance sites, and 8) a large acquisition.
Care.com (CRCM)
Our $9 price objective is based on 1.3x 2018E EV/Sales or 10x 2018E EV/EBITDA, in line
with small cap ecommerce and subscription peers. Care.com has category leadership
and a large TAM, but we do not believe 7% 2-yr expected revenue growth warrants a
premium to peers. At the same time, we believe that the Google Capital investment
could provide some downside support on take-out potential.
Downside risks to our PO are 1) need to add more customers each year to grow given
high churn, 2) competition from SitterCity and Homestead, and 3) new care offerings
Internet/e-Commerce | 06 April 2017 53
(mobile apps, premium nanny, date night payment services etc.) may not see much
traction, 4) lower conversion rates on mobile, 5) mobile conversions with 30% fee to
Apple and Google Play marketplaces could negatively impact margins, and 6)
international expansion may not be successful given different demographics.
Upside risks to our PO are 1) lower marketing spend resulting in higher margins and
better leverage in 2016, 2) revenue upside from cross-selling and word of mouth, 3)
increase length of stay for paid subscribers, reducing churn, and 4) traction from new
care offerings, Care at Work, and international expansion.
eBay (EBAY)
Our $38 price objective is based on 17x our 2018E EPS. Our 17x P/E multiple is slightly
ahead of the retail comp group average of about 16x, reflecting eBay's potential for a
Marketplace growth acceleration in 2017.
Risks to our price objective are: 1) competition from Amazon and other new
Marketplaces in the U.S., competition from Amazon, Alibaba and local incumbents in
International markets, and competition from multi-channel retailers that are
aggressively investing in the online channel, 2) vulnerability to future Google algorithm
changes, 3) decelerating user growth, resulting in eCommerce market share losses, and
4) currency risk including FX volatility impact on cross border trade. The stock has been
subject to heavy volatility in the past based on GMV growth and market share trends
and this volatility could increase due to economic uncertainty.
Expedia (EXPE)
Our $146 price objective is based on our sum of the parts (SOP) that assumes 9x 2018E
EBITDA for the core OTA business (a discount to Priceline at approx. 15x due to slower
organic growth and higher taxes on earnings), 8x 2018E EBITDA for Egencia (we expect
single digit growth), 60% ownership of Trivago (using our PO), and HomeAway at 15x
2018 EV/EBITDA.
Downside risks to our PO are: 1) economic downturn leading to fewer travel bookings, 2)
competition for European traffic lowering the company's growth or margin opportunity,
3) hotels favoring lower-cost alternative distribution channels and limiting Expedia's
access to inventory, 4) Google and/or TripAdvisor disintermediation, and 5) the negative
impact of terrorism and disease on global travel trends.
Facebook (FB)
Our $165 price objective is based on 24x our non-GAAP 2018E EPS and 27x GAAP EPS,
multiples equal to about 1x 2018E revenue growth, mostly in-line with its social and
online media peers.
Risks are: 1) high valuation that discounts strong growth, 2) changes in user
engagement impacts optimism on revenue opportunities and compresses the stock
multiple, 3) privacy issues or pushback on Facebook's policy changes impact revenue
generation, 4) risks to executing Messenger & WhatsApp monetization, 5) potential for
higher investment to negatively impact margins, and 6) a macroeconomic impact on
advertising pricing.
Fitbit (FIT)
Our $6.50 price objective is based on 0.5x EV/S multiple which is below the device
manufacturer peer group at 1.8x, but justified in our view given declining revenue and
profitability, FCF burn, market saturation, and limited visibility into the next product cycle.
Upside risks are: 1) international product launches and expansion, 2) higher-thanexpected
ASPs, 3) new product launches domestically, 4) slower-than-expected OpEx
ramp, 5) software monetization and 6) corporate wellness program growth.
54 Internet/e-Commerce | 06 April 2017
Downside risks are: 1) integration risk from smartwatches and other wearables
cannibalizing the fitness tracker market, 2) fad risk, as fitness trackers could be simply a
fitness fad with consumers, 3) competitive risk from competitors out-innovating, and 4)
execution risk on channel build and inventory management.
GoPro (GPRO)
Our $8 price objective is based on 10x our 2018E EBITDA, in line with the peer average
of 10x, which we believe is appropriate given its slightly higher growth and potential for
EBITDA margin expansion after restructuring. GoPro is the leading action camera
company in the world but has been challenged by execution issues limiting its ability to
drive strong product cycles.
Downside risks to our PO are: 1) new products fail to resonate with consumers, 2)
competitive pressure pushing down ASPs, and 3) failure to meet market demand during
holidays.
Upside risks to our PO are: 1) better than expected sales on new products, 2) better than
expected holiday sales from extra manufacturing capacity, 3) better than expected drone
sales, or new product announcements, and 4) new direct sales partnerships
internationally
GrubHub (GRUB)
Our PO is $49, based on 32x our 2018E P/E (vs. high growth internet at 31x). We believe
GRUB warrants a premium to eCommerce peers due to the attractive margins of the
core business and, relative to the overall small-cap sector, GRUB has more attractive
margins and growth potential.
Downside risks to our PO are:
Revenue and sales metrics are trailing KPIs for Diners and Restaurant and the potential
for diminishing returns on future restaurant and user additions is a risk. GrubHub has
significant room for growth in the US ahead, but will need to invest internationally if
domestic growth stalls.
LendingTree (TREE)
Our $140 price objective represents 14x 2018E EV/EBITDA, a premium to the lead
generation services and marketplace peer group average of 11x due to market position
(category leader in mortgage and personal loans) and faster revenue growth.
Risks to achieving our estimates and price objective are: 1) interest rate risks given the
demand for leads for mortgage and other loan products, 2) competition with other
consumer finance sites and ad networks, 3) potential for search engine
disintermediation and traffic competition, 4) potential for recessionary impact on loan
products (lower traffic and demand for leads) and credit card markets, 5) premium
valuation vs. lead generation and marketplace peers, and 6) acquisition risk.
Match Group (MTCH)
Our PO is $21 based on 12x our estimated 2018 EBITDA of $562mn and our DCF
valuation analysis. The basis for our PO is in-line with the eCommerce group, but a
premium to the consumer internet subscription services group due to MTCH's
combination of market dominance, profitability, and cash flow. We think fundamentals
help MTCH stand out from its ecommerce peer group and MTCH should be seen as a
more defensible platform that is unlikely to see disruption in its core markets.
Downside risks are: market share losses to an emerging dating business, potential for
higher acquisition costs on mobile, lower conversion rates that lead to lower PMC
growth, the need to acquire competing sites to maintain growth or market share, and
Internet/e-Commerce | 06 April 2017 55
higher-than-expected International investments. The biggest downside risk is lower
revenue if Tinder experiences a decline in popularity or public perception.
Netflix, Inc. (NFLX)
Our $154 price objective is based on a peak penetration sum-of-the-parts analysis
which discounts back future EPS at peak penetration by 10%. At peak penetration, we
assume domestic streams peak at 65mn subscribers in five years while the international
segment reaches 200mn seven years later. We assume APRU of $9.99 and 40%
contribution margins for the domestic business and a $8.50 APRU and 40% contribution
margin for the international business. We also assume a $1.50 price increase
domestically over six years and a $3.60 price increase internationally over twelve years
which will be 75% incremental to operating income. We assume a US tax rate of 40%
and an international tax rate of 25%. At peak penetration, we assume a 15x S&P
average multiple.
Downside risks to our price objective are: 1) increasing content costs, 2) potential new
competitors in the company's streaming business, 3) execution challenges and
competition potentially limiting growth in new markets, 4) U.S. saturation point
approaching quicker than expected, and 5) net neutrality repeal causing ISPs to look to
recoup higher rents from Netflix's high bandwidth requirements for streaming.
Upside risks to our price objective are: 1) content costs rising slower than expected, 2)
total subscriber growth is faster than expected, and 3) international expansion into new
large markets (e.g. China).
OnDeck Capital (ONDK)
Our $6 price objective is based on 10x our 2018E EBITDA. This is below the internet
ecommerce comparable group (11x) which is justified in our view given OnDeck's double
digit revenue growth and potential to expand margins starting in 2018 as it gains scale
and operating leverage, but tempered by a slower FY18.
Upside risks to our PO are: 1) faster than expected originations growth, 2) signing of
new large strategic partners, and 3) lower than expected operating expenses.
Downside risks to our PO are: 1) higher than expected loss rates from worsening macro
environment, 2) credit market freeze shutting down liquidity access, 3) lower effective
yield from competition, and 4) increased marketing spend.
Pandora Media, Inc. (P)
Our $9 price objective is based on 1x our 2018 revenue estimate, a significant discount
to online media and subscription service peers, but justified in our view as the multiple
takes into account the company's difficult transition to a subscription on-demand
service and lack of near term profitability balanced by the value of its data and user
base.
Upside risks to our PO are: 1) direct licensing agreements for lower royalty rates, 2)
international expansion announcements, 3) ad-load increases in key demos, increasing
monetization rates, 4) faster than expected launch of on-demand service, and 5) the
company is acquired.
Downside risks to our PO are: 1) emerging competition from both other Internet models
like Spotify and Apple Music, as well as large, established radio companies like
iHeartMedia embracing Internet streaming, 2) slow down in the company's ability to
grow monetization, 3) lack of historical or near-term GAAP profitability, and 4) delayed
on-demand service launch
56 Internet/e-Commerce | 06 April 2017
priceline.com (PCLN)
Our price objective is $1,920 based on 22x our 2018 adj. EPS estimate. The 22x
multiple is towards the upper end of Priceline's historical multiple range of 13-23x and
represents a PEG of 1.4x. We think a 22x forward P/E multiple is appropriate given midteens
EPS growth, strong booking trends, Priceline's leadership position in the global
online travel sector, track record of EPS upside, and increased access to the China
market via the Ctrip investment.
Risks to our PO are 1) a global economic downturn, especially macro-weakness in
Europe, leading to fewer travel bookings and pressure on room rates, 2) competition for
traffic lowering the company's growth or margin opportunity, 3) hotels favoring their
own distribution channels, 4) FX volatility, 5) increased competition from Expedia,
TripAdvisor and potentially Google, and 6) the impact of terrorism/disease on global
travel trends. The stock has been subject to heavy volatility in the past based on travel
industry trends and this volatility could increase due to greater economic uncertainty,
especially with macro-trends in Europe.
Quotient Technology Inc (QUOT)
Our $13 price objective is based on a 16x 2018E EBITDA, a premium to eCommerce
peers (11x), which we think is justified given stickiness of the Retailer IQ platform and
the slightly higher growth of 14% in FY17 vs. eCommerce group at 11%). Quotient is a
lead operator in online couponing, has a strong technological platform, relationships
with CPGs and a platform that is slowly spreading across grocers in the U.S.
Downside risks are: 1) further delays in point-of-sale system rollout with retailers, 2)
loss of major retailers or CPG, 3) higher-than-expected R&D and S&M costs due to
investment, and 4) limited float may contribute to volatility.
Upside risks to our analysis are: 1) additional retailers launching on their point-of-sale
system, 2) quicker-than-expected transition to digital couponing, 3) new additional
digital coupon retail clients (such as Walmart). and 4) targeted couponing lifting average
transaction pricing.
Snap (SNAP)
Our $25 PO is based on our DCF model as we do not expect the company to be
profitable until mid- to late-2019 and any earnings-based valuation exercise would
require discounting back future earnings. Our DCF assumes approximately $28bn
revenue by 2027 based on 525mn DAUs and $50+ in ARPU. Our PO implies 15.5x EV /
Revenue, above the peer group at 4x, as we believe Snap's early stage of ad
monetization and potential future leverage in the business model warrants a premium
valuation multiple to the social media group.
Upside risks to our PO are: 1) greater than expected reacceleration in North America
DAU growth, 2) more rapid monetization of existing user base with increased ad load
and/or new ad formats, and 3) better traction and monetization in International markets.
Downside risks to our PO are: 1) further deceleration in user growth that would raise
concerns on long-term revenue opportunity, 2) pressure on usage due to competing
services, and 3) performance into the first lock-up expiration on 7/29/17.
TripAdvisor (TRIP)
Our price objective of $40 is based on 25x our 2018 non-GAAP EPS estimate. This
multiple represents a modest premium to the group for possibly depressed margins and
re-accelerating top-line growth.
Downside risks to our price objective are: 1) increasing competition (e.g. Yelp), 2) macroeconomic
factors (e.g. recession in Europe) impacting the travel industry, 3) challenges
Internet/e-Commerce | 06 April 2017 57
to the credibility of online reviews, 4) Instant Book transition puts pressure on revenue
growth, and 5) mobile monetization headwinds.
Upside risks to our price objective are: 1) improved mobile monetization 2) major OTA
sign on for instant booking 3) high non-hotel shopper dollar capture and 4) improved
global macro environment.
Trivago NV (TRVG)
Our PO of $15 is based on a 3.5x 2018E EV/Sales multiple. We note that 3.5x is roughly
in line with the lead generation peer group average 2018E EV/Sales multiple. We think
our EV/Sales multiple is warranted as a balance between Trivago's higher growth and
lower profitability. Our price objective is supported by our DCF analysis.
Downside risks to our price objective are: 1) Growing competition, 2) Elevated marketing
spend, 3) High Customer concentration, 4) Macro and FX risks, and 5) Potential for loss
of hotel inventory.
Twitter (TWTR)
Our $14.5 price objective is based on 12x our 2018 EBITDA estimate, which reflects a
discount to the online media group (13x). We believe the Twitter platform has slowing
user and revenue growth and as such, we expect the stock to trade at a sustained
discount to online media peers, with potential M&A adding some offsetting downside
support.
Downside risks to our PO are: 1) decelerating user growth that may raise concerns on
long-term revenue opportunity, 2) pressure on usage due to emergence of competing
services, 3) new ad initiatives may not perform well, resulting in lower advertiser
demand for Twitter ads, 4) monetization of logged-out users and third party application
users are slow to materialize, and 5) on a EV/EBITDA basis Twitter is more attractive
today than in the past, but stock remains subject to multiple compression.
Upside risks to our PO are: 1) User adds could ramp on new product initiatives in the 2H,
and accelerating user growth may increase optimism on long-term revenue opportunity,
2) with new demographic targeting initiatives, Twitter is able to capture more TV dollars
(vs online ad dollars) that are incremental with video ads, 3) the NFL broadcasts and
other video content (live political, entertainment, etc.) could help Twitter grow users
meaningfully in the long term, 4) guidance could prove to be conservative, 5) traction
from monetization of logged-out users and 6) potential that Twitter could be acquired.
Wayfair (W)
Our price objective of $44 is based on 0.7x 2018E EV/sales. We continue to focus on
EV/Sales given Wayfair's lack of profitability to date. Our 0.7x target multiple is a
discount to W's eCommerce comp group and at a modest discount to W's retail comp
group. We think the multiple is appropriate given stronger revenue growth vs. peers,
balanced by lower profitability and competitive risks.
Downside risks are: 1) GAAP operating losses expected through 2018, making valuation
analysis more complex, 2) competition from several well capitalized companies including
Amazon, 3) brand complexity (5 brands), 4) category limitations, 5) partner segment
revenue headwinds, and 6) execution risk on International expansion.
Yahoo! (YHOO)
Our price objective of $57 is based on our sum-of-parts valuation assumptions. Our $53
estimated asset value represents $39/share from the remaining Alibaba stake (using
$122 Alibaba valuation {10% discount rate, mid-term FCF FY18-25E CAGR of 18%, 4%
terminal growth} x 384mn shares at 20% discount rate), $6.1 for Yahoo Japan, $0.5 for
Excalibur patents, and $6.9 in cash and cash equivalents on Yahoo's balance sheet. We
58 Internet/e-Commerce | 06 April 2017
assume $4.7/share in value for the core business based Verizon's pending acquisition
value of $4.83bn less $300mn for potential revisions.
Downside risks to our PO are: 1) Alibaba stock valuation declines, 2) Alibaba valuation
discount is higher than expected, 3) Verizon's pending acquisition of Yahoo core assets
is delayed/challenged, 4) valuation of Yahoo! Japan falls, and 5) valuation of Excalibur
patent portfolio falls.
Yelp (YELP)
Our $43 price objective is based on 14x 2018E EV/EBITDA, slightly above online media
comps, which we believe is warranted given the higher margin potential in the model.
We believe our multiple balances premium growth vs peers with medium-term concerns
on competition and limited GAAP profitability. We believe the slight premium valuation
is sustainable if the company can continue to deliver 25% y/y topline growth with y/y
margin improvement.
Downside risks are Google and Facebook's ambitions to build a review ecosystem to tap
into local ad spending, competition from a variety of online and offline locally focused
advertising businesses, Google traffic dependency, and advertiser churn.
Zillow (ZG / Z)
Our $42 price objective is based on a 6x our 2018E EV/Sales and supported by our DCF
valuation. Our multiple is roughly in-line for online real estate lead generation sites in
other countries operating in developed countries. In addition, this multiple represents a
relative discount given Zillow's higher sales growth and a larger US TAM in comparison
to its peers in smaller developed markets like Australia and Japan. We are positive on
Zillow's long term opportunity to capture the majority of realtor's dollars moving from
offline channels to online marketing channels.
Downside risks are: 1) traffic cannibalization between Zillow properties, 2) new lawsuits
again Zillow, 3) potential for multiple compression, 4) a U.S. housing market down turn,
and 5) lack of profitability support for valuation.
Upside risks are: 1) faster than expected growth and S&M leverage, 2) Zillow Digg
monetization, 3) accelerated grow the in rentals market, and 4) new market expansion.
ZYNGA (ZNGA)
Our $2.70 PO is now based on 11x 2018E EBITDA (which is a premium to the Mobile
gaming peer group due to margin expansion potential), plus $1.41/share in cash and
assets (building).
Downside risks to our price objective are mobile market share losses, challenges in
establishing successful new content given employee departures, and player churn due to
greater competition given low barriers to entry. Upside risks are successful new title
releases that accelerate growth, or potential acquisition of Zynga for its game portfolio.
Analyst Certification
We, Justin Post, Jason Mitchell and Nat Schindler, hereby certify that the views each of
us has expressed in this research report accurately reflect each of our respective
personal views about the subject securities and issuers. We also certify that no part of
our respective compensation was, is, or will be, directly or indirectly, related to the
specific recommendations or view expressed in this research report.
Internet/e-Commerce | 06 April 2017 59
Special Disclosures
BofA Merrill Lynch is currently acting as financial advisor to eBay Inc in connection with
the extension of a dual branded retail credit card with General Electric and committing
to purchase the loan portfolio in 2016. Deal announced along with Second Quarter
Earnings on July 16, 2014.
BofA Merrill Lynch is currently acting as financial advisor to Verizon Communications
Inc in connection with its proposed acquisition of Yahoo! Inc's operating business, which
was announced on July 25, 2016. The proposed transaction is subject to approval by
shareholders of Yahoo! Inc. This research report is not intended to (1) provide voting
advice, (2) serve as an endorsement of the proposed transaction, or (3) result in the
procurement, withholding or revocation of a proxy.
60 Internet/e-Commerce | 06 April 2017
US - Internet Coverage Cluster
Investment rating
BUY
NEUTRAL
UNDERPERFORM
RVW
Company
BofA Merrill Lynch
ticker Bloomberg symbol Analyst
Alphabet GOOGL GOOGL US Justin Post
Alphabet GOOG GOOG US Justin Post
Amazon.com AMZN AMZN US Justin Post
Bankrate RATE RATE US Nat Schindler
eBay EBAY EBAY US Justin Post
Expedia EXPE EXPE US Justin Post
Facebook FB FB US Justin Post
GrubHub GRUB GRUB US Nat Schindler
IAC InterActive IAC IAC US Nat Schindler
LendingTree TREE TREE US Nat Schindler
Match Group MTCH MTCH US Nat Schindler
Netflix, Inc. NFLX NFLX US Nat Schindler
OnDeck Capital ONDK ONDK US Nat Schindler
priceline.com PCLN PCLN US Justin Post
Take-Two Interactive TTWO TTWO US Justin Post
Trivago NV TRVG TRVG US Nat Schindler
Wix.com WIX WIX US Nat Schindler
Yahoo! YHOO YHOO US Justin Post
Zillow ZG ZG US Nat Schindler
Zillow Z Z US Nat Schindler
Activision ATVI ATVI US Justin Post
Electronic Arts EA EA US Justin Post
Quotient Technology Inc QUOT QUOT US Nat Schindler
Snap SNAP SNAP US Justin Post
Wayfair W W US Justin Post
Yelp YELP YELP US Justin Post
Care.com CRCM CRCM US Justin Post
Fitbit FIT FIT US Jason Mitchell
GoPro GPRO GPRO US Jason Mitchell
Pandora Media, Inc. P P US Nat Schindler
TripAdvisor TRIP TRIP US Nat Schindler
Twitter TWTR TWTR US Justin Post
ZYNGA ZNGA ZNGA US Justin Post
Chegg CHGG CHGG US Nat Schindler
Internet/e-Commerce | 06 April 2017 61
Disclosures
Important Disclosures
Equity Investment Rating Distribution: Electronics Group (as of 31 Mar 2017)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 29 59.18% Buy 14 48.28%
Hold 5 10.20% Hold 2 40.00%
Sell 15 30.61% Sell 5 33.33%
Equity Investment Rating Distribution: Media & Entertainment Group (as of 31 Mar 2017)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 40 56.34% Buy 21 52.50%
Hold 16 22.54% Hold 6 37.50%
Sell 15 21.13% Sell 6 40.00%
Equity Investment Rating Distribution: Technology Group (as of 31 Mar 2017)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 126 59.43% Buy 70 55.56%
Hold 35 16.51% Hold 17 48.57%
Sell 51 24.06% Sell 17 33.33%
Equity Investment Rating Distribution: Global Group (as of 31 Mar 2017)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 1578 51.33% Buy 979 62.04%
Hold 690 22.45% Hold 434 62.90%
Sell 806 26.22% Sell 381 47.27%
* Issuers that were investment banking clients of BofA Merrill Lynch or one of its affiliates within the past 12 months. For purposes of this Investment Rating Distribution, the coverage universe includes only stocks. A
stock rated Neutral is included as a Hold, and a stock rated Underperform is included as a Sell.
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price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst’s assessment of a stock’s: (i) absolute total return potential and (ii)
attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). There are three investment ratings: 1 - Buy stocks are expected to have a total
return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than
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referenced to better understand the total return expectation at any given time. The price objective reflects the analyst’s view of the potential price appreciation (depreciation).
Investment rating Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster*
Buy ≥ 10% ≤ 70%
Neutral ≥ 0% ≤ 30%
Underperform N/A ≥ 20%
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coverage cluster is included in the most recent BofA Merrill Lynch report referencing the stock.
Price charts for the securities referenced in this research report are available at http://pricecharts.baml.com, or call 1-800-MERRILL to have them mailed.
MLPF&S or one of its affiliates acts as a market maker for the equity securities recommended in the report: Alphabet, Amazon.com, Bankrate, Care.com, eBay, Expedia Inc, Facebook, Fitbit,
GoPro, GrubHub, LendingTree, Match Group, Netflix, OnDeck Capital, Pandora, priceline.com, Quotient, Snap, TripAdvisor, Trivago, Twitter, Wayfair, Yahoo!, Yelp, Zillow, ZYNGA.
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Fitbit, LendingTree, Match Group, OnDeck Capital, priceline.com, Trivago, Yahoo!, Zillow.
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eBay, Expedia Inc, Facebook, Fitbit, GrubHub, LendingTree, Match Group, Netflix, OnDeck Capital, priceline.com, Quotient, Snap, TripAdvisor, Twitter, Wayfair, Yahoo!, Yelp, Zillow, ZYNGA.
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62 Internet/e-Commerce | 06 April 2017
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