Baird analyst Colin Sebastian issued an update to investors on the potential Covid-19 impact on the internet stocks he covers, laying out his view on which e-commerce retailers might see the greatest impact and which other tech-related sectors could be hurt or stand to benefit.
E-COMMERCE EXPOSURE: Baird's Sebastian told investors that "clearly there are near-term disruptions to the merchant supply chain." Outside of Alibaba (BABA) and PayPal (PYPL), both of which have already warned investors of lower revenues, the analyst views the following as the most to least impacted in e-commerce:
In the medium-term, Sebastian believes "cocooning" could actually boost e-commerce growth rates, while online marketplaces should be somewhat less impacted than online retailers or direct-to-consumer brands due to their diversity of suppliers and/or seller base. At this point, the analyst sees negative first quarter guidance revisions as possible or even likely across his coverage as companies attempt to quantify the near-term headwinds from the Covid-19 outbreak.
MODEST IMPACT ON ONLINE ADVERTISING: Online advertising should feel some "modest impact," with travel an "obvious area of weakness," Sebastian added. The analyst noted that online advertising is somewhat susceptible to the economic cycle, in part due to the higher penetration rate of digital marketing. Furthermore, certain large categories of advertising such as travel/leisure will be negatively impacted as people delay trips and even avoid public place, he contends. However, Sebastian argued that these may be at least partially offset by higher click or impression volumes in categories such as healthcare and pharmaceuticals. In addition, any boost to online shopping will to some degree benefit online advertising platforms, in particular Google search (GOOGL). The "rough order of exposure" within his online advertising coverage is Twitter (TWTR), Google, Facebook (FB), Yelp (YELP), and Pinterest (PINS).
VIDEO GAMES COULD BENEFIT: The analyst sees video games as possibly benefiting from any prolonged "cocooning." Sebastian believes it is worth noting that interactive entertainment can be counter-cyclical, as a relatively inexpensive form of entertainment versus activities such as travel, dining and movies, in particular for console and PC games, which are primarily used at home. As such, any prolonged disruption from Covid-19 could fuel incremental gameplay, with Activision Blizzard (ATVI), Electronic Arts (EA) and Take-Two (TTWO) among the leading console game publishers he highlighted.
CURRENCY RATES POSE SOME RISK TO RESULTS: Sebastian also noted that currency rates are already moving, and pose some risk to reported results. Specifically, he pointed out that the Euro appears to be hardest hit so far year to date, while other currencies have remained relatively stable. However, the further spread of the virus may have a more significant impact on cross-border F/X trends, he adds. Among his coverage, companies with the largest F/X exposure include eBay, PayPal, Amazon, Twitter and Google.
Covid-19 is an infectious disease caused by the most recently discovered coronavirus, a large family of viruses which may cause illness in animals or humans. The outbreak began in Wuhan, China, in December 2019.
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