JPMorgan Analyst Sees Bright Spots in Internet Sector as Q2 Earnings Season Approaches
With the Q2 earnings season just around the corner, the internet sector is buzzing with anticipation. While some companies face uncertainty amid a potential slowdown in consumer spending, JPMorgan analyst Doug Anmuth has identified Amazon.com Inc (NASDAQ: AMZN), Uber Technologies Inc (NASDAQ: UBER), and Alphabet Inc (NASDAQ: GOOG, GOOGL) as standout picks. Despite the mixed performance of the internet sector so far this year, Anmuth remains optimistic about these large-cap names, believing they are well-positioned to navigate the evolving market landscape.
Key Takeaways:
- Amazon remains Anmuth’s top pick thanks to continued growth in its core areas like Amazon Web Services (AWS) and retail operations. He anticipates a surge in AWS growth in Q4 2024, driven by easing optimizations, new workload migrations, and the increasing monetization of Generative AI (GenAI).
- Google is making a strong GenAI push and enjoying significant margin expansion, contributing to its stock hovering near all-time highs. The company continues to benefit from robust revenue growth in Search and YouTube, while its progress in GenAI is fueling investor optimism.
- Uber is a standout in the rides and food delivery sector despite recent pressures. Its rideshare business is demonstrating resilient demand, with accelerating monthly active user growth potentially driving further mobility gains. Uber’s commitment to profitability and shareholder returns, evident in its consistent EBITDA beat and recent share buyback program, also makes it a compelling investment.
Amazon: Steady Growth and Strong Free Cash Flow
Amazon remains Anmuth’s top choice, both for the short and long term. He highlights the company’s strong positioning for continued growth in its core areas, including AWS, its cloud computing division, and its retail operations. Anmuth believes AWS growth will accelerate in the near term, projecting a 20% growth rate for Q4 2024, driven by factors like easing optimizations, new workload migrations, and the ramping up of GenAI monetization. This means Amazon is leveraging its expertise in cloud computing to capitalize on the burgeoning GenAI space, a strategic move likely to generate substantial revenue.
Beyond AWS, Anmuth expects Amazon’s North America operating income (OI) margin to expand by 190 basis points in 2024, driven by improvements in shipping, inventory placement, automation, and advertising. This indicates a focus on efficiency and cost optimization, which should translate into improved profitability for the company. Additionally, Amazon’s free cash flow is projected to reach $66 billion in 2024 and $86 billion in 2025, demonstrating its financial strength and ability to invest further in its growth initiatives.
For Q2, Anmuth projects net sales between $148 billion and $150 billion and operating income of $14 billion to $15 billion or more. These figures highlight the continued positive momentum in Amazon’s core businesses.
Google – GenAI Offensive, Margin Expansion
Google’s strong performance, backed by its aggressive push into GenAI, significant margin expansion, and a buoyant advertising environment, has made it another top pick for Anmuth. The company’s stock is near all-time highs, buoyed by strong revenue growth in its core businesses – Search and YouTube. Google’s progress in GenAI, combined with better-than-expected ad revenue, has further boosted investor sentiment.
Anmuth projects a 13% year-over-year FX-neutral revenue growth for Alphabet, Google’s parent company, and a GAAP operating income margin of 30.8%, representing a 140 basis point improvement. This signifies Google’s ability to generate more profit from its existing operations while investing in its future growth opportunities, particularly in GenAI.
However, the upcoming decision on the DOJ search distribution trial remains a potential headwind for Google. The outcome of this trial could have significant implications for Google’s search business and, consequently, its overall revenue stream.
Uber – Resilient Demand, Profitability Initiatives
Despite recent pressures in the rides and food delivery sector, including noise surrounding Tesla Inc‘s (NASDAQ: TSLA) robotaxi ambitions and weaker restaurant traffic data, Uber has emerged as a standout performer. Uber’s rideshare indicators remain robust, with accelerating MAU (monthly active user) growth potentially driving further mobility growth. This indicates a strong underlying demand for Uber’s ride-hailing services, despite competitive pressures and market fluctuations.
Anmuth emphasizes Uber’s commitment to profitability and shareholder returns. The company has consistently surpassed its EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) guidance and has recently prioritized greater accuracy in its projections. Additionally, Uber has initiated a share buyback program with Anmuth estimating a $7 billion buyback over three years, possibly completed in two years. This program signifies the company’s confidence in its future prospects and its commitment to enhancing shareholder value.
For Q2, Uber’s rideshare business is expected to show a 26% year-over-year growth in gross bookings, while the food delivery segment may face some pressure from weaker restaurant traffic, potentially affecting the 17.5% year-over-year growth forecast for delivery gross bookings. Despite potential challenges in the food delivery segment, Uber’s robust rideshare performance and its commitment to profitability make it a noteworthy pick for investors.
A Bifurcated Internet Sector
Anmuth remains positive on the internet sector as a whole, highlighting its bifurcated performance year-to-date. While the market cap-weighted average gain stands at 30%, the overall coverage universe has experienced a 3% decline. This indicates a divergence in performance within the sector, with large-cap giants like Amazon, Uber, and Google outperforming their smaller counterparts. As the earnings season kicks off, investors will scrutinize these large-cap names for signs of continued growth and resilience, particularly amidst evolving market dynamics.
In conclusion, Amazon, Uber, and Google are well-positioned heading into Q2 2024 earnings, bolstered by solid underlying trends, strategic growth initiatives, and strong financial performance. These factors, combined with JPMorgan’s positive outlook on the internet sector, make these three companies attractive investment opportunities for investors seeking exposure to the growth potential of the digital economy.
