Internet stocks with high interest income could see free cash flow drags due to the new rate environment

Higher interest income and free cash flow growth in a rising rate environment may create a drag affecting net income as yields on cash fall faster than borrowing costs, Barclays analysts said in a note.

Analyst Trevor Young wrote that higher interest income has been “an under-appreciated tailwind” to free cash flow in the last two years for many stocks, and as we enter a falling interest rate environment, that might reverse.

He said that there are a few offsets that could mitigate the impact, such as “improving marks on marketable securities boosting OI&E, or lower potential interest expense for those names with debt in the capital stack,” but nevertheless, he said he believes this could be “a sneaky drag on net income and free cash flow growth.”

Focusing on internet stocks, online travel names stand out due to their favorable working capital dynamics, he added. “Cash collections are typically stronger early in the year when end-consumers book travel, with payouts to suppliers later in the year, giving these companies substantial ‘float’ to invest, hence why interest income is so meaningful for them.”

But stocks with higher interest income as a percentage of free cash flow are more likely to see a drag on their free cash flow as rate cuts come in.

The following internet stocks (NYSEARCA:ARKW) had their interest income as a percentage of free cash flow be a meaning contributor to their 2023 free cash flow. Analysts now see a similar distribution in 2024.

• (SNAP) – Interest income as a & of FCF: 484%
• (IAC) – Interest income as a & of FCF: 148%
• (RBLX) – Interest income as a & of FCF: 114%
• (CHWY) – Interest income as a & of FCF: 52%
• (TRIP) – Interest income as a & of FCF: 27%
• (SHOP) – Interest income as a & of FCF: 27%
• (DUOL) – Interest income as a & of FCF: 22%
• (ZIP) – Interest income as a & of FCF: 19%
• (ABNB) – Interest income as a & of FCF: 19%
• (PINS) – Interest income as a & of FCF: 17%
• (CART) – Interest income as a & of FCF: 15%
• (BKNG) – Interest income as a & of FCF: 15%
• (UBER) – Interest income as a & of FCF: 14%
• (DASH) – Interest income as a & of FCF: 11%
• (EXPE) – Interest income as a & of FCF: 11%
• (EBAY) – Interest income as a & of FCF: 10%
• (LZ) – Interest income as a & of FCF: 10%
• (NRDS) – Interest income as a & of FCF: 8%
• (AMZN) – Interest income as a & of FCF: 8%
• (GOOGL) – Interest income as a & of FCF: 6%
• (ETSY) – Interest income as a & of FCF: 5%
• (META) – Interest income as a & of FCF: 4%
• (MTCH) – Interest income as a & of FCF: 3%
• (SQSP) – Interest income as a & of FCF: 3%
• (MELI) – Interest income as a & of FCF: 3%