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European internet stocks are on track to rise in 2024 thanks to improving fundamentals and lower interest rates, according to Morgan Stanley. Analysts at Wall Street banks said they were “positive about the sector,” citing customer growth, corporate cost discipline and valuations supported by lower interest rates. The optimism for tech and internet stocks comes after a difficult 2023, when concerns about slowing growth, inflation and rising interest rates hit the sector. According to the bank, the median rise in European internet stocks in 2023 is just 11%, lagging the 13% rise in the broader European market. Morgan Stanley names food delivery companies Deliveroo and Delivery Hero, global tech investor Prosus, online marketplace Scout24, digital learning company Pearson and travel app Trainline as ‘most preferred’ or preferred stocks. He cited the possibility of a significant increase. All six stocks are also traded over-the-counter in the United States. Delivery Hero German-listed Morgan Stanley has set a price target of 40 euros (about $44), which would imply an upside of 71% from the current share price. Delivery Hero’s stock price has fallen for the past three consecutive years and is currently trading 28% below its 2017 initial public offering price, according to FactSet data. The company ran out of cash chasing global growth while facing stiff competition from local companies and global giant Uber. However, the company is currently closing its overseas operations (most recently in Taiwan and Turkey) to cut costs. Delivery Hero’s “portfolio consolidation” is also seen as a potential catalyst for this year, but is not yet reflected in the current stock price, Morgan Stanley analysts said. Bank analysts led by Miriam Josiah said in a note to clients on Jan. 3 that the cost base is now right-sized, with volume recovery and advertising products expected to accelerate growth in 2024 and operating leverage. This should encourage cash generation.” The bank has set a price target for Deliveroo at 150 British pence, implying an upside of 17% from current levels. British stocks are normally priced in pence, with 100 pence equaling 1 British pound ($1.26). Analysts said Deliveroo would approach free cash flow breakeven in 2024, “which should confirm investors’ confidence in the sustainability of the food delivery model.” Morgan Stanley analysts say the dual-class share structure that gave founder Will Schuh too much control will also expire in early 2024, shifting control to a broader shareholder base. There is a possibility that the excess portion of the stock will be eliminated. Prosus The investment bank has set a price target for Prosus at 43 euros, implying an upside potential of 58%. The investment holding company’s main asset is a 28% stake in Chinese technology giant Tencent. Tencent is Morgan Stanley’s 2024 China Internet Stock of the Year. The Wall Street bank said Prosus’ e-commerce businesses outside of Tencent are also currently profitable, “which should pave the way for future value creation.” “In stock.” — CNBC’s Michael Bloom contributed reporting.
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