In a report summarizing the sweeping adjustments Monday, Morris cited an effort to shift analysis of the companies to bring it more in line with that of software companies, a group led by Microsoft.
Snapchat parent Snap Inc. earned an upgrade from “neutral” to “buy,” with its price target rising to $28 from $22. Pinterest starts off as a “buy,” with a price target of $48. Facebook, Google parent Alphabet, Roku, Netflix, Spotify and Twitter all saw their targets upped.
The revised target prices represent a premium of 9% to 30% over current valuations. Shares in Roku, rated “neutral” by Morris, are projected to be at $173 in 12 months, which would be a 5% drop from today’s levels.
The revised targets were developed after comparing them to the median for a 35-stock software company group, Morris said.
“We are revising our valuation framework for our digital media coverage universe to better reflect
comparability with peer companies in the software industry,” Morris wrote in the report. “We believe that there are greater core similarities between internet and software companies than implied in current valuations and expect investors will continue to evolve their view to reflect this, driving incremental appreciation for internet shares.”
Mega-cap firms Alphabet and Facebook are directly matched with Microsoft, which Morris sees as “most similar in terms of size, business diversity, research and development investment and potential investor base.”
Elaborating on his reasoning, Morris observed that “at the core, ‘internet’ companies are software development and distribution companies that largely focus on consumer rather than enterprise applications.”
The two groups of companies vie for the same sources of private capital and workers, he added.
Furthermore, “We believe that ‘stickiness’ of platform is a key component of long-term cash flow generation for both software and internet companies. Enterprise adoption tends to be more critical for software whereas consumer network effect is more impactful to internet, though both industries benefit from both dynamics.”