In many ways, in the public Internet segment, 2015 was the year of FANG -- Facebook (FB 107****), Amazon.com (AMZN 694 ****), Netflix (NFLX 119****) and Google, now Alphabet (GOOGL 794 ***) -- and spin-offs.
Year to date through December 29, the FANG stocks rose on average 88%, compared with a flat S&P 500. The shares of Facebook rose 37%, Amazon was up 125%, Netflix increased 139%, and Alphabet/Google appreciated 50%.
eBay (EBAY 28 ***) spun off PayPal (PYPL 37 NR) in July. In November, IAC/InterActiveCorp (IACI 61****) spun off a minority stake in Match Group (MTCH 14 NR). Of course, Yahoo (YHOO 34 ****) essentially started the year by announcing in January the then-pending spin-off of its valuable stake in Alibaba (BABA 83 ****) (to have been called Aabaco), and ended the year by announcing weeks ago the cancellation of such plans. Interestingly, Yahoo is now looking to spin off its non-Alibaba assets and businesses.
We think the spin-off trend could continue in 2016 in 2017, with Yahoo, and maybe Alphabet taking action on some non-Google operations.
Getting back to the year that was, based on our assessments, 11 of the "15 Internet Predictions for 2015" were strongly correct. Two of the others were part right and part not so right.
We thought Yahoo would not execute on "tax-advantaged options for its stakes in Alibaba and Yahoo Japan in 2015." This prognostication did not seem so smart early in the year, but as indicated, the company eventually cancelled plans for the Aabaco IPO. We also thought a "combination between Yahoo and AOL" would not occur, despite activist pressures. Yahoo remains independent, and AOL was bought by Verizon in June.
"Despite considerable positive headlines and perceived momentum," we did not see Apple Pay (AAPL 109 *****) becoming "a serious threat to incumbent digital payment options in 2015," and saw "PayPal as a continuing global leader in the digital payments category." In the third quarter alone, PayPal's 173 million active customer accounts generated an increase in total payment volume of 27% to $70 billion, with adoption and engagement that we think was substantially greater than Apple Pay's.
We also thought the PayPal spin-off would be a positive catalyst for eBay shares, leading to outperformance for the year. Accounting for the spin-off, eBay shares rose 18% year to date through December 29, compared with a flat S&P 500.
We saw Alphabet's/Google's "growth story as intact," and in the first three quarters of this year, the company delivered double-digit revenue growth without adjusting for the significant negative impact of the strong U.S. dollar. We also thought YouTube was a business to watch, and it is currently featured on the cover of Barron's (dated December 28, 2015, "Why YouTube is Twice as Valuable as Netflix").
We also saw Alphabet/Google "increasingly leveraging its strong balance sheet for efforts like M&A and even share repurchases," and the company announced its first-ever stock buyback in October 2015.
In our view, Facebook would "continue to be successful and dominant in the social media category," despite concerns about demographics and competition, and that Instagram would be a "business to watch." Facebook is now worth over $300 billion, and Instagram has over 400 million users and has one of the world's most popular mobile apps.
For Twitter (TWTR 22 *****), we saw "management changes as likely," and note a new Executive Chairman, CEO and COO were named in October, capping many high-level changes throughout the year.
Lastly, we thought legal and regulatory matters would remain an impactful issue for many Internet companies. Think global privacy issues involving Internet giants, European antitrust allegations against Alphabet/Google, and a variety of matters related to Uber, for example.
While we got many things right for 2015, we also got some things wrong. Most notably, Twitter did not outperform the market, falling 38% year to date through December 29, compared with a flat S&P 500. We see the stock as notably undervalued.
We also saw Yahoo as active on the M&A front, but the company seemed to focus on the Aabaco spin-off and fending off activists, instead of doing deals. We also expected more consolidation in the online music streaming area and considerable IPO activity in 2015. While Pandora (P 14 ***) moved to purchase Rdio and a few notable names like Etsy (ETSY 9 NR) completed IPOs, bigger deals did not happen.
Without further delay, here are our predictions for 2016
- Yahoo will announce a CEO change.
- The company will also announce a major M&A transaction worth more than $1 billion (perhaps involving the sale of an important asset or business).
- Alphabet will start disclosing YouTube revenues.
- Some will contemplate a YouTube spin-off. We see a spin-off of a non-Google Alphabet business as more likely.
- Alphabet will expand its $5 billion repurchase program, after just starting it in October.
- eBay will initiate a quarterly dividend.
- Facebook continues to push into large and small businesses for customers and users.
- WhatsApp achieves over 1 billion monthly active users and Facebook provides more details on monetization plans.
- Although many have described Twitter as a "no-growth" company, it will achieve an annual revenue increase of more than 40%. We do not see the company being acquired.
- Akamai (AKAM 53 ****) is announced as an M&A target for a larger company looking to get strategically stronger and take share in "the cloud."
- China's BAT -- Baidu (BIDU 195 ***), Alibaba (BABA 83 ***) and Tencent -- moderate their aggressive external investment/M&A activities. None of these companies will acquire Akamai.
- Perhaps due to increasing competitive pressures, IAC will make progress on the acquisition of Angie's List (ANGI 9 NR).
- Verisign (VRSN 89 **) is contemplated as an M&A target, with private equity making sense, but concerns related to the importance of government contracts and influence help keep the company independent. We see the stock underperforming.
- Reflecting considerable competition, Pandora continues to diversify its business model and revenue streams.
- WebMD's (WBMD 49 **) operational and stock performance disappoint, given competitive forces, a more moderate flu season, and an overhang regarding drug prices and pharmaceutical/biotech marketing spending.
- Blucora (BCOR 10 ****), which is in the process of transforming from an Internet search/advertising/e-commerce company into a next-generation financial technology firm, will rename itself and outperform from a stock perspective.
Best wishes for a healthy, happy and prosperous new year, and we will look to revisit our 16 Internet predictions for 2016 within the next year or so.
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Copyright©2015. For important regulatory information, please go to www.capitaliq.com/home/legal-disclaimers.aspx.