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While the pandemic has not had the same effect on all players in the extremely diverse Internet – Services industry, those players that were adversely impacted are also climbing out of the blues.
However, since this is a capital-intensive industry with high fixed cost of operation and the fairly constant need to expand capacity, it takes longer to recover from any drop in demand.
Because of the increased digitization and greater reliance on digital services over the past few months, a number of players have been able to recoup their losses to stage strong comebacks. Valuation hasn’t kept up in all cases.
Internet - Services companies primarily own/operate huge software and hardware infrastructure/properties, to deliver services to consumers. Consumers avail services by accessing these properties with their personal connected devices from almost anywhere in the world.
Companies in the sector generally operate two models: an ad-based model where the service is offered free and an ad free model where they charge for the service. Alphabet, Facebook and Baidu are larger players while Dropbox, Etsy, Shopify, ANGI Homeservices, Uber, Lyft and Trivago are some emerging players.
COVID has brought mixed fortune for the industry because the wide range of services provided by this group has meant that some services were used more while others were used less. Things that helped people stay home for work, business or pleasure flourished. Others suffered.
Factors Shaping The Industry
Traffic acquisition is one of the most important drivers of revenue, so companies invest in advertising or building communities that can draw more users to their online properties and get them to spend more time there, much like a store owner would try to keep a prospective buyer within the store. Some large players, including those providing infrastructure services, grow by tying up with other such large players for access to their customers. Since the personal touch is absent in an online store, many rely on cookies and other technologies to track users, collect data on them and profile them in order to better understand their needs.
As these companies have grown over time, some of them have collected such a wealth of information on their users that the data itself is now helping them build artificial intelligence (AI) to lower cost and generate new technologies and services. As a result, ad-based services are no longer considered free in some parts of the world and the EU in particular has framed a complex law in GDPR that requires service providers to acquire explicit permission from users before collecting their data. More recently, the U.S. has also expressed concern over the lack of competition in the space as big players with a lot of data virtually dominate their markets.
The installed base of connected devices continues to grow beyond PCs and smartphones to IoT, automotive and more, creating additional opportunities for targeting. The ownership of multiple devices automatically drives people to use these services more as they increasingly automate routine chores.
While not all businesses are built on the same scale or have the same customer reach, the scope for growth is huge. For companies that are already pursuing research in AI, the prospects are even brighter.
Zacks Industry Rank Indicates Improving Prospects
The Zacks Internet - Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #194, which places it among the bottom 24% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates near-term challenges.Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is because of its relatively slow recovery from the pandemic. However, its aggregate earnings estimate revisions for 2021 and 2022 are encouraging, with estimates rising steadily since March. The aggregate estimates for 2021 and 2022 are up an average 52.7% and 19.1%, respectively from last year, when the industry was hit pretty badly.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Leads on Stock Market Performance
The industry has kept ahead of both the broader sector and the S&P 500 index through most of the past year and particularly, since March.
The industry has soared 56.9% during this period compared to the broader sector’s 42.3% gain and the S&P 500 index’s 34.4% gain.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, which is a commonly used multiple for valuing technology companies, we see that the industry is currently trading at a 25.8X multiple, which is below its median value of 28.9X over the past year, a reflection of the recent uptick in earnings estimates. The multiple is above the S&P 500’s 21.6X although below the sector’s 27.6X. It is not unusual for the tech sector to trade at a higher multiple than the S&P 500 because of its higher growth profile.
Forward 12 Month Price-to-Earnings (P/E) Ratio
Image Source: Zacks Investment Research
3 Stocks Worth Buying
DeNA Co., Ltd (DNACF - Free Report) : Tokyo-based DeNA Co. offers a large and varied rage of services through online platforms such as Coopel, a cloud robotic process automation service; Mobage, a platform that hosts free-to-play mobile games; Yahoo! Mobage, which offers games for PC browsers; and AndApp, a platform that allows users to play mobile game apps on PC browsers under the same user account.
While the company offers entertainment through games and live streaming as well as sports and healthcare services, it’s clear that recent strength has come from the live streaming segment, which is growing strongly within Japan and expanding overseas. Overall, key growth strategies DeNA appears to be employing at the moment includes strategic acquisitions and international expansion. Expanding its range of games and touching new genres are also part of its long-term plan.
We don’t have quarterly analyst estimates for this stock and June quarter results are yet to be reflected in the annual estimates.
The shares of this #1-ranked company are up 7.1% over the past year.
Price Performance: DNACF
Image Source: Zacks Investment Research
Internet Initiative Japan, Inc. (IIJIY - Free Report) : The company offers a comprehensive range of Internet access and other network services mainly to enterprise customers and also to other Internet service providers in Japan.
It is seeing very strong demand at enterprise customers that it expects will continue through the current year and beyond. This is allowing it to leverage its existing infrastructure to generate very strong double-digit growth in gross, operating and net profits. The strength in demand has encouraged management to raise the revenue and profit projections for 2021 as well.
The company is slated to report results tomorrow. There is a single analyst providing annual estimates (only), and within the last seven days, he has raised his 2022 (ending March) and 2023 estimates by a respective 23.8% and 25.9%.
The shares of this #1-ranked company are up 57.4% over the past year.
Price Performance: IIJIY
Image Source: Zacks Investment Research
Shopify, Inc. (SHOP - Free Report) : Ottawa, Canada-based Shopify Inc. provides a multi-tenant, cloud-based, multi-channel commerce platform for small and medium-sized businesses (SMBs). What distinguishes the company from an online marketplace like Amazon is its store-front approach, which keeps vendor brands front-and-center, thereby helping to build brand loyalty.
The company stands to gain from the shift of physical commerce to digital commerce, a trend that the pandemic has only exacerbated. And with the growing number of users, the data insights it provides vendors has become that much more valuable. But the company is also making platform enhancements like Shopify Payments (for payment processing), Shipping (for easy shipping) and Capital (to help merchants with their working capital needs) and these changes appear to be delivering results. International expansion, acquisitions and strategic partnerships such as those with Google and Facebook are part of its growth strategy.
So while competition is stiff and the need to invest constant, the company went ahead to beat June quarter estimates by a solid 128.6%. the 2021 estimate has increased 4.8% since. The 2022 estimate has increased 5.4%.
The shares of this Zacks Rank #1 stock are up 53.4% over the past year.
Price Performance: SHOP
Image Source: Zacks Investment Research
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3 Internet Services Stocks Worth Buying Today
While the pandemic has not had the same effect on all players in the extremely diverse Internet – Services industry, those players that were adversely impacted are also climbing out of the blues.
However, since this is a capital-intensive industry with high fixed cost of operation and the fairly constant need to expand capacity, it takes longer to recover from any drop in demand.
Because of the increased digitization and greater reliance on digital services over the past few months, a number of players have been able to recoup their losses to stage strong comebacks. Valuation hasn’t kept up in all cases.
Our picks are DeNA Co., Ltd (DNACF - Free Report) , Internet Initiative Japan Inc. (IIJIY - Free Report) and Shopify, Inc. (SHOP - Free Report) .
About The Industry
Internet - Services companies primarily own/operate huge software and hardware infrastructure/properties, to deliver services to consumers. Consumers avail services by accessing these properties with their personal connected devices from almost anywhere in the world.
Companies in the sector generally operate two models: an ad-based model where the service is offered free and an ad free model where they charge for the service. Alphabet, Facebook and Baidu are larger players while Dropbox, Etsy, Shopify, ANGI Homeservices, Uber, Lyft and Trivago are some emerging players.
COVID has brought mixed fortune for the industry because the wide range of services provided by this group has meant that some services were used more while others were used less. Things that helped people stay home for work, business or pleasure flourished. Others suffered.
Factors Shaping The Industry
While not all businesses are built on the same scale or have the same customer reach, the scope for growth is huge. For companies that are already pursuing research in AI, the prospects are even brighter.
Zacks Industry Rank Indicates Improving Prospects
The Zacks Internet - Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #194, which places it among the bottom 24% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates near-term challenges.Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is because of its relatively slow recovery from the pandemic. However, its aggregate earnings estimate revisions for 2021 and 2022 are encouraging, with estimates rising steadily since March. The aggregate estimates for 2021 and 2022 are up an average 52.7% and 19.1%, respectively from last year, when the industry was hit pretty badly.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Leads on Stock Market Performance
The industry has kept ahead of both the broader sector and the S&P 500 index through most of the past year and particularly, since March.
The industry has soared 56.9% during this period compared to the broader sector’s 42.3% gain and the S&P 500 index’s 34.4% gain.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, which is a commonly used multiple for valuing technology companies, we see that the industry is currently trading at a 25.8X multiple, which is below its median value of 28.9X over the past year, a reflection of the recent uptick in earnings estimates. The multiple is above the S&P 500’s 21.6X although below the sector’s 27.6X. It is not unusual for the tech sector to trade at a higher multiple than the S&P 500 because of its higher growth profile.
Forward 12 Month Price-to-Earnings (P/E) Ratio
Image Source: Zacks Investment Research
3 Stocks Worth Buying
DeNA Co., Ltd (DNACF - Free Report) : Tokyo-based DeNA Co. offers a large and varied rage of services through online platforms such as Coopel, a cloud robotic process automation service; Mobage, a platform that hosts free-to-play mobile games; Yahoo! Mobage, which offers games for PC browsers; and AndApp, a platform that allows users to play mobile game apps on PC browsers under the same user account.
While the company offers entertainment through games and live streaming as well as sports and healthcare services, it’s clear that recent strength has come from the live streaming segment, which is growing strongly within Japan and expanding overseas. Overall, key growth strategies DeNA appears to be employing at the moment includes strategic acquisitions and international expansion. Expanding its range of games and touching new genres are also part of its long-term plan.
We don’t have quarterly analyst estimates for this stock and June quarter results are yet to be reflected in the annual estimates.
The shares of this #1-ranked company are up 7.1% over the past year.
Price Performance: DNACF
Image Source: Zacks Investment Research
It is seeing very strong demand at enterprise customers that it expects will continue through the current year and beyond. This is allowing it to leverage its existing infrastructure to generate very strong double-digit growth in gross, operating and net profits. The strength in demand has encouraged management to raise the revenue and profit projections for 2021 as well.
The company is slated to report results tomorrow. There is a single analyst providing annual estimates (only), and within the last seven days, he has raised his 2022 (ending March) and 2023 estimates by a respective 23.8% and 25.9%.
The shares of this #1-ranked company are up 57.4% over the past year.
Price Performance: IIJIY
Image Source: Zacks Investment Research
The company stands to gain from the shift of physical commerce to digital commerce, a trend that the pandemic has only exacerbated. And with the growing number of users, the data insights it provides vendors has become that much more valuable. But the company is also making platform enhancements like Shopify Payments (for payment processing), Shipping (for easy shipping) and Capital (to help merchants with their working capital needs) and these changes appear to be delivering results. International expansion, acquisitions and strategic partnerships such as those with Google and Facebook are part of its growth strategy.
So while competition is stiff and the need to invest constant, the company went ahead to beat June quarter estimates by a solid 128.6%. the 2021 estimate has increased 4.8% since. The 2022 estimate has increased 5.4%.
The shares of this Zacks Rank #1 stock are up 53.4% over the past year.
Price Performance: SHOP
Image Source: Zacks Investment Research