Morgan Stanley names its 'most preferred' European internet stocks — and gives one 70% upside

Published Mon, Jan 8 20246:17 PM EST

Internet stocks in Europe are set for gains in 2024 — thanks to improving fundamentals and falling interest rates, according to Morgan Stanley. The Wall Street bank's analysts said they're "positive on the sector" because of customer growth, cost discipline at companies, and valuations being supported by declining interest rates. The optimistic view on tech and internet stocks comes after a difficult 2023, when worries over slowing growth, inflation and higher interest rates battered the sector. According to the bank, the median European internet stock rose just 11% in 2023, lagging behind the broader European market's 13% gain. Morgan Stanley named food delivery services companies Deliveroo and Delivery Hero , global tech investor Prosus, online marketplace Scout24 , digital learning company Pearson , and travel app Trainline among its "most preferred" or favored stocks, citing significant upside potential. All six stocks are also traded in the U.S. over the counter. Delivery Hero For the Germany-listed company, Morgan Stanley set a price target of 40 euros ($44), which implies a 71% upside from the current share price. Shares in Delivery Hero have fallen in the past three consecutive years and are now trading 28% below its 2017 initial public offering price, according to FactSet data. The company burned through cash chasing global growth while facing stiff competition from local players and global giant Uber. However, the company is now closing operations abroad — most recently in Taiwan and Turkey — to cut costs. Delivery Hero's "portfolio consolidation" is also seen as a potential catalyst this year, which is not yet reflected in the current share price, according to Morgan Stanley analysts. "Cost base now right sized, accelerating growth in 2024 driven by volume recovery and advertising products should drive operational leverage and cash generation," the bank analysts, led by Miriam Josiah, said in a note to clients on Jan. 3. Deliveroo The investment bank set a price target of 150 British pence on Deliveroo, implying a 17% upside from current levels. U.K. shares are generally priced in pence, with 100 pence equal to one British pound ($1.26). The analysts said Deliveroo nears free cash flow breakeven in 2024, "which should underpin investor confidence in the sustainability of the food delivery model." The dual-class share structure that gave founder Will Shu outsized control also expires in early 2024, meaning control will shift to a broader shareholder base, which could remove an overhang on the stock, according to Morgan Stanley's analysts. Prosus The investment bank set a price target of 43 euros on Prosus, giving it 58% upside. The investment holding company's primary asset is a 28% stake in Chinese tech giant Tencent. Tencent is Morgan Stanley's "top pick" within Chinese internet stocks for 2024. Elsewhere, Prosus' e-commerce businesses outside of Tencent are now also profitable, according to the Wall Street bank, which it said "should clear the path to future value creation" in the stock. — CNBC's Michael Bloom contributed reporting.