Zillow – 7 Best Communication Services Stocks for the Rest of 2021 | Fintech Zoom
The future of the communication services sector is being shaped today by several secular, or long-lasting, trends: high-speed wireless connectivity, online video streaming, connected devices and services that enable the digital lifestyle including social media and gaming.
The sector comprises telecom carriers that operate wired and wireless internet connections, media and entertainment companies that create content, and interactive digital firms that provide the platforms enabling a virtual life.
Year-to-date, the S&P 500 Communication Services sector is up 24.5% compared to 17.5% for the S&P 500 Index. The forward price-to-earnings (P/E) ratio for the sector is 22.6, a tad higher than the broader index’s 21.6, which is not surprising given that it includes many fast-growing tech stocks. Within the sector, interactive media and services stocks have been the top performers, up 46.7% year-to-date.
Gauging the stocks in the sector will differ, given the increased diversity of companies following the 2018 shuffling in which many names formerly classified under information technology or consumer discretionary were moved to communication services. For example, telecom companies tend to pay higher dividends but also have higher capital expenditures, while many tech companies focus on growth rather than shelling out dividends.
Here are seven communication services stocks for the remainder of 2021. They each have consensus Buy ratings from analysts, as measured by S&P Global Market Intelligence, and will likely benefit from the long-term digital trends.
Data is as of July 23. Analyst ratings and average 12-month price targets courtesy of S&P Global Market Intelligence.
- Market value: $231.0 million
- Analyst ratings: 2 Strong Buy, 2 Buy, 0 Hold, 0 Sell, 0 Strong Sell
- Average 12-month price target: $17.50
Gaia (GAIA, $12.02) is an online video streaming service specializing in what it calls “consciousness-expanding” content such as yoga and meditation classes, as well as shows on alternative healing and other non-mainstream topics. It also develops original content, such as a series called Thrive: Self-healing with Ayurveda and a documentary titled The Healing Field: Exploring Energy & Consciousness.
B. Riley analyst Eric Wold has a Buy rating on Gaia and a price target of $17 ahead of the company’s early August earnings report. GAIA reported first-quarter results in May that beat Wall Street’s consensus expectations. Gaia has generated positive adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for six consecutive quarters and positive free cash flow for the last three quarters. The strong balance sheet means management can focus beyond short-term results and reinvest in the business for the long term.
Gaia ended the first quarter with more than 750,000 paying subscribers, up 24% from the prior year. Wold says the company is focused on three growth initiatives: a premium live access tier for $299 a year; expansion into German and French offerings to add to its Spanish offerings; and word-of-mouth growth through increased engagement with existing members.
The analyst notes that the company’s board approved a share buyback program, meaning that it is confident about its cash flow generation. Wold says Gaia is undervalued compared to other communication services stocks. According to its annual report, Gaia says 80% of its content is only available on its platform, differentiating it in the crowded online video marketplace.
- Market value: $62.7 billion
- Analyst ratings: 17 Strong Buy, 2 Buy, 3 Hold, 0 Sell, 2 Strong Sell
- Average 12-month price target: $453.18
If most people had to guess which online video device dominates the market, they probably would say it is either Apple‘s (AAPL) Apple TV, Google’s Chromecast or Amazon.com’s (AMZN) Fire TV. The perhaps surprising answer, though, is Roku (ROKU, $473.65), which has the highest U.S. installed base among streaming media devices, according to a report by market research firm Parks Associates.
So how did Roku manage to get ahead of the tech giants? It offers viewers ease of use, affordability and a unique feature such as a headphone output in the remote control. Roku is also a possible merger target of Comcast, according to a report in The Wall Street Journal. Roku also has been branching out into content with a $1 billion budget in 2021, CNBC reported a person familiar with the matter as saying, and licenses its operating system to smart TV manufacturers.
Wedbush analyst Michael Pachter has an Outperform (Buy) rating on the stock, with a 12-month price target of $475. Roku will continue to benefit from the shift to online video streaming, which accelerated during Covid, and it also is in the early stages of international expansion, he says in a research report. As advertisers shift their spending to online video, Roku will be a “primary beneficiary as it has dominant market share, a rapidly growing user base and superior target capabilities,” the analyst adds.
“The Roku platform is an elegant solution in a universe of inelegant solutions,” Pachter continues. Roku has a “superior user interface, search function and simple remote control.” He expects the company to continue to “thrive for several years” and develop solutions for manufacturers that will “substantially” increase its reach for at least the next decade.
William Blair analyst Ralph Schackart also has an Outperform (Buy) rating on the stock. He says in a research report that Roku’s first-quarter performance beat Wall Street’s expectations on “all major financial metrics with accelerating ad monetization.” Moreover, the company issued a better-than-expected forecast for the second quarter, although tempering expectations for the second half of 2021. “Roku will emerge stronger post-COVID-19,” the analyst adds.
- Market value: $45.9 billion
- Analyst ratings: 10 Strong Buy, 4 Buy, 5 Hold, 1 Sell, 0 Strong Sell
- Average 12-month price target: $171.450
As vaccination rates increase, people are becoming more willing to meet face-to-face to find love. Match Group (MTCH, $165.86) is the leader in the online dating market, according to Morningstar. Match operates more than 45 brands including Match.com, Tinder, Hinge and OKCupid – four of the top brands in North America. Match.com is the most popular dating site in the U.S., while Tinder is the most downloaded dating app worldwide.
Jefferies analyst Brent Thill (Buy) says that the “Summer of Love” is heating up faster than expected based on third-party data checks, according to a recent note. Both revenue and downloads improved month-over-month for Hinge and Tinder. He expects Match’s second-quarter revenue to beat Wall Street’s consensus estimate due to an improving economy, decreasing COVID-19 case counts and increased vaccination rates in key Western European markets, he adds.
Match’s dating sites serve different demographics, cultures and locations, and as such, have created a “network effect” for its portfolio of services as online dating becomes more commonplace, says Morningstar analyst Ali Mogharabi in a note. This concentration of online dating brands adds another benefit: Match can further consolidate the brands’ technological infrastructure, enabling them to be more scalable and efficient operationally.
The rising number of singles globally also provides a tailwind to Match’s revenue growth. In North America, Mogharabi estimates that the singles group should increase moderately through 2025, based on U.S. Census Bureau data. He expects growth of singles for Western Europe and Asia-Pacific, which comprises the bulk of Match’s international markets, but at a slower rate. Also, he sees Match adding more users as it targets the rest of the world.
Putting it all together, MTCH is one of the best communication services stocks to watch going forward.
- Market value: $123.3 billion
- Analyst ratings: 22 Strong Buy, 7 Buy, 9 Hold, 0 Sell, 1 Strong Sell
- Average 12-month price target: $84.47
Snap (SNAP, $77.97) is the parent of Snapchat, one of the world’s most popular social media and messaging platforms, with 293 million daily active users, mostly between the ages 18 and 24. This populous reach lets the company “benefit from a network effect among its customer base and is starting to attract the attention and dollars of advertisers with a growth trajectory toward nearly $3.8 billion in revenue,” says Morningstar analyst Ali Mogharabi in a report.
Snap CEO Evan Spiegel famously turned down a $3 billion buyout offer from Facebook in 2013, and reportedly a multi-billion-dollar bid from Google. Since getting spurned, Facebook has rolled out features similar to Snapchat in Instagram: filters, stories, disappearing posts and others.
While Facebook remains a formidable competitor to Snap, the company continues to innovate and is pushing aggressively into the augmented reality (AR) arena. The latest generation of its smart Spectacles, which first debuted in 2016, came out in May. The glasses let users see the world in AR, overlaying computerized images onto real world surroundings. Fast Company magazine named Snap the world’s most innovative company of 2020.
Snap is rated a Buy, on average, by the 39 analysts covering the stock that are tracked by S&P Global Market Intelligence. Their average price target on the communication services stock is $84.47, based on a range of forecasts between $42 and $110.
In its first quarter of 2021, Snap reported free cash flow for the first time as a public company, as well as better-than-expected revenue and pro forma earnings, although it still booked a net loss. For the second quarter, Snap posted year-over-year revenue growth of 116% to $982 million, while its adjusted EBITDA improved 223% to $117 million.
- Market value: $1.9 billion
- Analyst ratings: 6 Strong Buy, 0 Buy, 4 Hold, 0 Sell, 0 Strong Sell
- Average 12-month price target: $23.30
It’s no secret that cord-cutting continues to erode the video business of cable operators. WideOpenWest (WOW, $22.24) is not immune to these structural trends, but its aggressive pivot towards becoming a broadband-first provider rather than cable TV or landline phone puts it in a good spot among its fellow communication services stocks. Today’s consumers prioritize fast internet speeds, and WOW’s network offers 1,000 Mbps in about 95% of the 19 markets in which it operates.
Regional players like WOW are “well-positioned to take advantage of these structural tailwinds” of cord-cutting and demand for fast broadband, writes analyst Daniel Day of B. Riley, in a recent note. Moreover, WOW could be a possible acquisition target since recent transactions of “well-maintained” broadband assets have attracted “premium valuations,” he says.
“With valuations for broadband assets soaring, we are especially positive on WOW in the near term, as we see no reason the stock trades at such a substantial discount to its public peer group and its private market value,” Day says. He has a Buy rating on the shares.
Raymond James recently upgraded the stock to Strong Buy after the company agreed to sell its operations in five service areas – Cleveland and Columbus, Ohio, Chicago and Evansville, Indiana, and Anne Arundel, Maryland – in two transactions for $1.8 billion. WOW plans to use the proceeds to reduce debt. After the sale, WideOpenWest said it would cut its leverage ratio, a measure of indebtedness, in half.
Raymond James calls the deal “transformational,” saying it will lead to a “far lower debt load” for faster free cash flow generation. It expects WOW to speed up expansion into new markets. Importantly, the company retained the most attractive assets in the deal. The firm gave the stock a price target of $30, implying expected upside of 35% over the next 12 months or so.
- Market value: $27.8 billion
- Analyst ratings: 12 Strong Buy, 3 Buy, 5 Hold, 3 Sell, 0 Strong Sell
- Average 12-month price target: $175.05
Zillow Group (ZG, $113.28) has come a long way from its initial start as a real estate website known for Zestimate, its automated home valuation model. In 2020, as people fled urban centers for roomier homes in the suburbs, Zillow saw an annual high of 245 million unique visitors to its Zillow, Trulia and StreetEasy sites, according to the company’s annual report.
ZG, whose co-founder and CEO Rich Barton also founded Expedia (EXPE) when he was at Microsoft (((MSFT))), is embarking on a major expansion in its business model. In addition to providing real estate marketplaces and earning advertising revenue, Zillow wants to be involved directly in buying and selling real estate. For example, Zillow Closing Services offers title and escrow services and Zillow Home Loans provides mortgages.
A rising trend in the industry is the concept of iBuying, where companies offer cash for homes as-is in as short as 24 hours after the seller fills out an online questionnaire about the house. This method takes the hassle out of the traditional home sales process that includes home repairs, staging, an open house, solicitation of bids and negotiations with buyers, among other complicated steps. However, there’s a cost to convenience: the homeowner typically gets less with iBuying and the cash offer is non-negotiable. Zillow Offers is Zillow’s iBuying arm.
The home sales market is ripe to be disrupted, and ZG is one communication services stock that’s along for the ride. In its current form, home sales is a “massive offline market, where 90% of transactions involve an agent,” says CFRA analyst Kenneth Leon in a recent research note.
“We think digitization is in the early inning and can disrupt how homes are transacted, even with today’s low level of inventory,” he adds. Here, digital-first real estate companies such as Zillow have the edge. “Compared to offline realtors, we see emerging disruptors as having competitive advantages with their expertise in software and data.”
- Market value: $11.4 billion
- Analyst ratings: 13 Strong Buy, 5 Buy, 1 Hold, 1 Sell, 0 Strong Sell
- Average 12-month price target: $13.25
Remember FarmVille? It was one of the games that made Zynga (ZNGA, $10.45) a household name. Since FarmVille’s 2009 launch on Facebook, Zynga has seen its share of ups and downs. The games developer’s dependence on FB for the distribution, marketing and payment of games became its undoing when the social media giant made changes that resulted in a drop in players, among other issues.
Also, Zynga, which developed the popular Words with Friends multiplayer online game, had a string of games that did not maintain large audiences.
Today, ZNGA is a different company under CEO Frank Gibeau, a former Electronic Arts executive who took over from Marc Pincus in 2016. In the first quarter of 2021, Zynga reported record quarterly revenue and bookings, buoyed by strong performances of Words with Friends, CSR2 and its Casual Cards portfolio. Also doing well was Harry Potter: Puzzles & Spells. Zynga expects to launch FarmVille 3 and Star Wars: Hunters globally in 2021.
The company’s turnaround came partly as a result of a slew of acquisitions: Peak Games (Toon Blast, Toy Blast), Rollic (Go Knots 3D, Tangle Master 3D), Echtra Games (Torchlight III), Gram Games (Merge Gems!, Merge Dragons!) and Harpan (Solitaire, FreeCell, Pyramid, Spider Solitaire), among other companies.
Wedbush has an Outperform (Buy) rating on the communication services stock, which also is on the firm’s “Best Ideas List” for its ability to “build iconic ‘forever’ franchises, integrate highly accretive studios and uniquely benefit from Apple‘s (user privacy) changes.” (Zynga is planning to create its own ad platform with the acquisition of Chartboost.)
Analyst Michael Pachter says Zynga posted “record-breaking bookings” for the fifth straight quarter. He sees several growth drivers for the company: continued investment in ‘hyper-casual’ games (free to download, easy-to-play games), launching of cross-platform games and international expansion. He has a $15 price target on the stock, implying expected upside of .43.5%
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.