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3 Top-Ranked Internet Stocks to Buy in a Challenging Industry

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The Zacks Internet – Content industry is benefiting from solid demand for digital offerings as well as increasing importance of video content and cloud-based applications. Industry participants like Shutterstock (SSTK - Free Report) , Brightcove (BCOV - Free Report) and Perion Networks (PERI - Free Report) are benefiting from these trends amid disruption caused by coronavirus.

Although the coronavirus-led chaos is expected to hurt in the near term, the pandemic has opened up new channels of growth for Internet content providers. The industry participants have witnessed solid demand for e-commerce services from home-confined consumers amid lockdowns and restrictions on traveling. Moreover, resurgence in digital advertising is a key catalyst.

Industry Description

The Zacks Internet – Content industry comprises providers of video encoding platform, personal services, Internet content & information, staffing & outsourcing services, publishing, capital markets and media-based companies.

Apart from the United States, a number of companies in this industry are located in Israel, United Kingdom, Germany, Russia and China.

3 Trends Shaping the Future of the Internet - Content Industry

Growing Demand for Digital Offerings: The industry is characterized by rapid technological change, frequent product and service introductions, and evolving standards. An expanding range of mobile, digital and cloud-based offerings by industry participants is a major growth driver. Moreover, proliferation of smart devices and increasing automation of the application development process bode well.

Coronavirus Hurts Ad Demand: Industry participants are focusing on marketing efforts to boost traffic to websites. Advertising and subscriptions are major sources of revenues for these companies. Also, the industry is dependent on consumer spending trends, making holiday spending a major deciding factor. However, sluggish advertising demand and reduced budget for online advertising due to the coronavirus-led economic downturn is a potent headwind.

Increasing Regulations Mar Prospects: Industry participants, involved in online search and other social-networking activities, are increasingly facing regulatory pressure, particularly in China, Russia and the European Union (EU). The China government has a number of regulations related to direct advertising, which is a prime revenue source for these companies. Moreover, post Facebook’s (FB - Free Report) Cambridge Analytica scandal that affected 87 million users, the industry participants have been facing rigorous scrutiny in the United States as well as the EU. The implementation of General Data Protection Regulation, which took effect on May 25, 2018 in the EU, adds to the concerns. Moreover, California Consumer Privacy Act (CCPA), which restricts sales of user data among other things, is a headwind for the industry participants.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Internet - Content industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #170, which places it at the bottom 32% 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 gloomy near-term prospects. 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.

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 Lags on Shareholder Returns

The Zacks Internet - Content industry has lagged the broader Zacks Computer and Technology sector as well as the Zacks S&P 500 composite over the past year.

The industry has returned 6% over this period against the 14.2% increase of the S&P 500 and the 38.3% rally of the broader sector.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of the trailing 12-month price-to-sales ratio (P/S), which is a commonly used multiple for valuing Internet - Content stocks, we see that the industry is currently trading at 8.83X compared with the S&P 500’s 4.54X and the sector’s trailing 12-month P/S of 5.66X.

Over the last five years, the industry has traded as high as 9.24X, as low as 6.02X and at the median of 8.46X, as the chart below shows.

Trailing 12-Month Price-to-Sales (P/S) Ratio

 

 

3 Internet Stocks to Watch

Shutterstock: This New York-based company operates as a global marketplace for digital imagery. This Zacks Rank #1 (Strong Buy) company offers image services comprising vectors, photographs, and illustrations, which are utilized in visual communications and related content, and tools. You can see the complete list of today’s Zacks #1 Rank stocks here.

Shutterstock’s expanding total addressable market is a key catalyst. Prospects are bright given increasing demand for images, video clips and music tracks from digital advertisers as well as small and medium businesses accessing the digital channel for growth. Moreover, solid streaming video adoption and growing demand for podcasts are tailwinds.

The Zacks Consensus Estimate for its 2020 earnings has surged 46.2% to $2.28 per share over the past 30 days. Shutterstock’s shares are up 62.4% year to date.

Price and Consensus: SSTK

 

Brightcove: This Boston, MA-based company provides cloud-based services for video. Its flagship product is Video Cloud, an online video platform that enables customers to publish and distribute video to Internet-connected devices.

Further, this Zacks Rank #2 (Buy) is benefiting from increased video adoption across media and enterprise customers. The company’s over-the-top solution Beacon has witnessed significant adoption in recent quarters.

The consensus mark for 2020 loss has been stable at 23 cents per share over the past 30 days. The stock has lost 29.6% year to date.

Price and Consensus: BCOV

 

Perion Network: This Israel-based global technology company delivers online advertising solutions and search monetization to brands and publishers in North America, Europe and internationally. It is committed to providing digital advertising solutions to capture consumer attention and drive engagement as well as deliver ads across a portfolio of websites and mobile applications.

Perion recently extended its contract with Microsoft’s (MSFT - Free Report) Bing. The company generates a significant part of its revenues through the partnership. The extension bodes well for Perion’s long-term prospects. Recovery in advertising demand as well as inclusion of CIQ and Pub Ocean in Perion’s portfolio is a major growth driver in the near term.

The Zacks Consensus Estimate for its 2020 earnings has soared 41.7% to 17 cents per share over the past 30 days for this Zacks Rank #2 stock. Perion’s shares have gained 17.5% year to date.

Price and Consensus: PERI

 

 

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