Internet Advertising: More Mature Than It Used To Be -- Pivotal Research Group

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We are initiating coverage of the Internet Advertising sector with BUY ratings on Amazon, The Trade Desk, Facebook, and Twitter, and HOLD ratings on Google, Snap, and Pinterest. It pays to be selective in today's environment. Our proprietary surveys are supportive of the ad environment through early 2Q, particularly at TTD and AMZN and we think can be a critical part of investor's mosaics. TTD in incredibly well-positioned as they hit an inflection point in connected TV advertising, and AMZN's move to one-day retail is the beginning of another disruptive journey for retail.

AMZN - BUY –The highest quality management and franchise within global internet -- a must own name with huge upside even from here. Retail was bound to slow at some point, and advertising we believe will become increasingly correlated with GMV growth. These are less relevant to the valuation than investors might appreciate. AWS duration will surprise to the upside both on topline and EBIT and the move towards one day shipping is a significant step to owning the consumer's wallet.

TTD - BUY –A truly unique asset, growing at among the fastest rates in the industry as they penetrate the opportunity in programmatic advertising. Delivering a rare combination of strong growth and profitability (unlike most other SAAS peers). Among the highest quality management teams in the space, with two massive incremental legs of potential growth around connected TV and China.

FB - BUY– Leader in social media, with estimates that we believe are conservative for both revenues and EPS. 2019 could be a peak investment year, and we see potential new legs to the story substantial enough that they can move the needle even at FB's size.

TWTR - BUY – They have cemented their position firmly as the number two player behind FB in social. We like where they are in terms of product innovation and expect GAAP operating margins to improve into 2020 and beyond. We see optionality in getting direct response correct next year as well.

GOOG - HOLD –Maturity comes at a cost and at the heart of the Internet, slowing Internet=slowing GOOG website growth. Lacking expansion of margins or greater disclosure, it unlikely to rerate higher and will likely always be "cheap." APAC to become a disproportionate contributor to growth in the out years, where we are above consensus, and will have more duration than investors appreciate.

SNAP - HOLD –We think the ship is prospectively turning and are highly encouraged by progress over the last several quarters. Execution is all moving in the right direction but need to be convinced that they have strength outside of several advertising verticals. There is a scenario that we are being too conservative on revenue growth but given YTD performance and no FY EBITDA profitability until 2021 keeps us on the sidelines for now.

PINS - HOLD –We think they have executed nicely and have potential optionality with international and self-serve into 2020. At this multiple, the company still needs to demonstrate that they are more than a niche. We do not have meaningful upside to revenues until 2021 and beyond, and while valuation is rarely a hold up for us, the premium to the rest of online media is so substantial that we believe it is reflected in the stock price.

RISKS:1) Over saturation of online marketing within overall ad budgets, 2) valuations, 3) changes in data policy impact targeting and ROIs 4) macro-economic weakness causes greater than expected deceleration advertising, 4) Government regulation, 5) anti-trust.

FULL REPORT INCLUDING RISKS AND DISCLOSURES CAN BE FOUND HERE: Initiation Internet 5-29-19.pdf

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