RBC Capital: 5 Tech Stocks to Buy Before Earnings

Alphabet

• Market value: $770.0 billion
• TipRanks consensus price target: $1,388.63 (26% upside potential)
• TipRanks consensus rating: Strong Buy (Get GOOGL Research Report)

Google parent Alphabet (GOOGL, $1,105.18) is set to report its third-quarter earnings Oct. 25 after the closing bell. And the largest internet business by ad revenues “has averaged 23% growth for 34 (count ‘em) straight quarters & shows no signs of slowing,” Mahaney cheers. This, despite a massive $120 billion revenue run-rate.

He believes Alphabet’s investments in the cloud, connected homes and driverless vehicles potentially set GOOGL up for many years of premium growth and profits.

As for the third quarter specifically, Wall Street’s “reasonable” estimates are for $34.1 billion in gross revenues, $25.31 billion in net revenues and $10.45 in GAAP (Generally Accepted Accounting Principles) earnings per share. Mahaney calls the estimates “relatively reasonable,” but sees gross revenues of $33.6 billion (up 21% year-over-year) and net revenuse of $27.0 billion (up 22% YoY). That should be driven by ongoing strength in mobile search, programmatic and YouTube.

Mahaney has a place for GOOGL among his mega-cap tech stocks to buy right now. He currently rates the stock a “Buy” and has a very bullish $1,400 price target, indicating 27% upside potential ahead.

Dropbox

• Market value: $9.4 billion
• TipRanks consensus price target: $34.60 (48% upside potential)
• TipRanks consensus rating: Moderate Buy (Get DBX Research Report)

Mahaney also singles out file-hosting service Dropbox (DBX, $23.38) as a top tech stock pick ahead of earnings. With shares down 21% intra-quarter, he spies a very attractive entry point at current levels.

“We believe (DBX) has reasonably conservative Street estimates, in part based on probable ARPU (average revenue per user) trends,” Mahaney writes. Dropbox guided third-quarter revenues of $350 million to $353 million, which implies 22% to 23% year-over-year growth. Though it would represent 4 percentage points of quarter-over-quarter deceleration.

He continues, “Q2’s ARPU inflection point likely paves the way for very robust revenue growth going forwards, and (we) see a favorable near-term set-up for the stock.”

The overarching bullish thesis: “We continue to view Dropbox as addressing a large (total addressable market) and view it as one of the clear market leaders,” Mahaney writes. Notably, DBX’s freemium model enables highly cost-efficient customer acquisition, very high customer retention levels and substantial revenue visibility.

Mahaney has a price target of $36 on DBX, implying 54% upside potential.

Expedia

• Market value: $17.7 billion
• TipRanks consensus price target: $153.84 (30% upside potential)
• TipRanks consensus rating: Strong Buy (Get EXPE Research Report)

Online travel giant Expedia (EXPE, $118.32) is expected to release its results on Oct. 23. Mahaney writes, “We’re most incrementally near-term constructive on EXPE – which has traded down 8% intra-quarter, but we believe has a reasonable shot at upwards estimates revisions on the print.”

He cites healthy macro lodging trends and reasonable Wall Street estimates as positive drivers for the stock. Analysts as a whole expect bookings of $25 billion, revenues of $3.3 billion and $3.15 in EPS. They also see year-over-year room-night growth at 14%, versus 12% in Q2.

Expedia has traded up following earning results in both the first and second quarters of this year, which bodes well heading into Q3. Three days after reporting, EXPE was up by 7% and 6% in Q1 and Q2, respectively.

“EXPE is more aggressively investing in Tech and Marketing to scale its global footprint and catch up to industry leader BKNG,” Mahaney writes. “We also see a tremendous growth runway for HomeAway, as the company grows its footprint domestically and pushes into International markets and urban locations.”

Expedia remains an excellent play on the secular growth in online travel, Mahaney concludes. That’s why he gives the stock a $150 price target – good for 27% upside ahead.

Facebook

• Market value: $444.8 billion
• TipRanks consensus price target: $203.70 (32% upside potential)
• TipRanks consensus rating: Strong Buy (Get FB Research Report)

Social media giant Facebook (FB, $154.05) is set to release its all-important third-quarter data on Oct. 30. Shares are off 14% year-to-date, and considering how choppy trading has been all October, earnings could propel shares significantly – higher or lower.

Mahaney still has Facebook among his top tech stocks to buy right now, however, recently reiterating his “Buy” rating and a $225 price target (46% upside). For the third quarter, Mahaney thinks Facebook will report revenues of $13.76 billion, adjusted EBITDA of $8.44 billion and earnings of $1.53 per share – pretty close to consensus estimates of $13.76 billion, $8.16 billion and $1.47 per share, respectively.

Sure, FB shares have faced multiple challenges recently – executive departures, regulatory probes and security breaches – but Mahaney doesn’t believe that’s reason to unfriend Facebook anytime soon. “(Facebook) stills owns two of the largest media assets in the world (Facebook & Insta) & the two largest messaging assets in the world (Messenger & WhatsApp),” he writes.

Indeed, Facebook has more than 2.5 billion monthly active users – a metric it’s still growing in the teens, percentage-wise, year-over-year.

“The large amount of data collected on these users is a unique and valuable asset for ad and content targeting,” writes Mahaney, adding that he sees multiple “growth levers” ahead.

Spotify

• Market value: $26.8 billion
• TipRanks consensus price target: $212.58 (43% upside potential)
• TipRanks consensus rating: Moderate Buy (Get SPOT Research Report)

Keep a close eye on fast-growing music streaming stock Spotify (SPOT, $148.93), which will release its numbers Nov. 1.

The company only went public in April, making market reactions harder to predict. But Mahaney carried out a deep dive into the stock’s current position ahead of the big day. The good news? Spotify is now the top music app on Android phones in 12 of the 20 largest countries in the world, and the No. 1 music app on iPhones in 11 of these countries.

Consensus estimates come in at $1.5 billion in revenues (up 29.4% year-over-year), funneling down to a 41-cent loss for Q3. But the key items to focus on include paid subscriber numbers and monthly active users. Spotify itself guided to 85 million to 88 million paid subscribers for the third quarter, with 188 million to 193 million in monthly active users. Mahaney sees these estimates as highly achievable, looking for 86 million paid subscribers (39% YoY growth) and 193 million MAUs.

Regardless of these results, the bigger picture remains clear: Spotify is the world’s largest music streaming service with almost double the number of paid subscribers (83 million) as its closest competitor. This is in a market (music sales) that is now worth more than $17 billion worldwide.

Mahaney forecasts shares will rise 44% from current levels to his price target of $215.

Harriet Lefton is head of content at TipRanks, a comprehensive investing tool that tracks more than 4,700 Wall Street analysts as well as hedge funds and insiders. You can find more of TipRanks’ stock insights here.