It’s been a tough year for internet stocks. But Goldman Sachs Group Inc. thinks there’s at least a handful of names that are worth buying.
Facebook Inc., Alphabet Inc. (Google’s parent company), Twitter Inc., LinkedIn Corp. and Amazon.com Inc. are Goldman’s five top-ranked stocks of the 34 internet names the bank covers. While all but one of these stocks are down on the year and underperforming the S&P 500, Goldman believes that these names will “ultimately outperform.”
Within the internet sector, which was down 11% year-to-date through Friday, Goldman ranked constituents by their growth, leverage, innovation and competitive advantage.
Combining all the parts, social network Facebook came out as Goldman’s top-ranked stock, followed by Alphabet, Twitter, LinkedIn and Amazon.com. The bank has “buy” ratings on all of these shares, even though Facebook is the only stock up on the year, rising 3.1% in 2016 versus a loss of 5% for the S&P 500.
That LinkedIn and Twitter make Goldman’s list might surprise some investors. The stocks of both have been especially punished this year, with Twitter down 22% and LinkedIn off 48%. In LinkedIn’s case, weaker-than-expected guidance for 2016 drove shares down 44% in a single session. For Twitter, shares have tumbled amid stalled user growth and key executive changes. Those factors aside, Goldman thinks these firms offer a good combination of growth and returns, which is why the bank recommends the stocks.
Goldman likes Facebook and Twitter specifically because of their estimated sales growth over the next few years.
Alphabet and Facebook are also top ranked at the bank because of their leverage, which Goldman measures by incremental margins.
“While there are exceptions, many of the online advertising companies like Alphabet and Facebook benefit from above-average incremental margins while many of the ecommerce companies like Amazon and Etsy experience below average incremental margins given continue needed investment in fulfillment and scaling the marketplace,” wrote Goldman.
The bank also said it likes its five top-ranked companies because of their focus on innovation and sustainable advantages, or lack of “real competitive barriers.”