Internet stocks like Facebook are overpriced despite 'behind the curve' bullish call, trader says

Is it time to double down on digital?

On Tuesday, analysts at KeyBanc decided it is. The firm initiated coverage on a range of internet and digital media stocks in a note subtitled, "Digital Acceleration Creates New Opportunities."

KeyBanc initiated coverage of social media plays including Facebook, Snap, Pinterest, and Match Group, content-related stocks including Netflix and Roku and household management names such as ANGI Homeservices with overweight ratings. It rated Twitter, Spotify and Yelp as sector weight.

But Gina Sanchez, CEO of Chantico Global, said there's a glaring problem with the timing of KeyBanc's calls.

"I think Keybanc is behind the curve on this. I think so much of these moves are already priced in," she said Tuesday on CNBC's "Trading Nation."

She said the S&P 500 itself is about 45% overvalued based on its 10-year trailing price-to-earnings ratio. The media and entertainment segment, on which KeyBanc is particularly bullish, is roughly 85% overvalued by that metric, she said.

In addition, many internet stocks are at or near all-time highs, and investors have more than enough reason to bide their time, Sanchez said.

"If you're long this group, this group has actually paid you very handsomely. But if you look at how it's responding here in September, the market is down. This segment is down more. It's going to be a lot more sensitive," she said. "This is not where you want to be buying in, especially since we have questions about stimulus. Until we know what is going to happen with stimulus and how the recovery is going to map out, whether it's a V, a W, a U, an L, whatever letter you want to ascribe to it, you have to know that before you continue to buy the sector. I say you stay away if you're not in it."

Todd Gordon, a managing director at wealth management firm Ascent Wealth Partners, took the other side of the trade.

"Yes, we have extreme, stretched valuations, but we also have an interest rate environment that is changing the calculation of equities' earnings with very low interest rates," he said in the same "Trading Nation" interview.

"This market is trading like we are in the next tech boom," Gordon said. "We are on an inevitable timeline to change the way we're going to interact socially and on an e-commerce basis. … Covid just accelerated this, so, I hate to say we're in a new boom, but something tells me that the buying is not over, and I don't think it's too late to get in."

Looking at the charts, Gordon saw opportunity in two of KeyBanc's top picks: Match Group and Facebook.

With a recent breakout under its belt and "a little bit of uptrend support" near the $107 level, Match Group's stock looked strong on a technical basis, Gordon said.

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As the parent company of popular online dating platforms including Tinder and Match.com, "it's a leader in the online dating space," Gordon said.

"They're benefiting from the stay-at-home. They're implementing a lot of technology, creating synergies across all of their brands in terms of infrastructure. They've just started a new video stream on several of their platforms," he said. "Think Zoom for dating. So, we think the social stigma of online dating in this new normal is going away and people are meeting this way. Specifically with the mobile connectivity, 5G coming aboard, we really like this one. We hold it in our strategy."

Match Group shares closed up 2.5% on Tuesday at $110.98 a share.

Facebook's stock also recently broke out following the company's better-than-expected second-quarter earnings report, Gordon noted.

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"Last quarter's earnings broke us from a range … that has been in place since 2018," he said. "We're pulling back to support right now at about 265. If you don't own the stock, maybe you look at picking up some there."

Facebook ended trading more than 2% higher on Tuesday at $272.42 a share.

Gordon said he expects Facebook and its subsidiary Instagram to remain "dominant" players in the digital landscape.

"They are the go-to platforms for advertising for small businesses," he said. "If Covid subsides, I think there's going to be sort of a reignition of advertising spend in Facebook, and that's going to clear the way for new initiatives."

Disclosure: Ascent Wealth Partners owns shares of Match Group and Facebook.

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