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3 Internet Delivery Stocks to Keep an Eye On in a Battered Industry

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The COVID-19 pandemic-triggered travel restrictions and social-distancing measures imposed by governments across the world are hurting the Zacks Internet - Delivery Services industry. Nonetheless, a recovery is anticipated for companies like MakeMyTrip Limited (MMYT - Free Report) , Vipshop Holdings Limited (VIPS - Free Report) and QuinStreet, Inc. (QNST - Free Report) , as countries are slowly reopening their economies and lifting the travel bans. Additionally, greater Internet presence in the emerging markets, a burgeoning affluent middle class and the accelerated uptake of smartphones will help participants in the Internet – Delivery Services industry. However, steep marketing expenses due to planned expansion into new delivery markets will be a persistent overhang on margins in the near term.

Industry Description

The Zacks Internet - Delivery Services industry primarily comprises companies that offer services via Internet-based platforms. These include food delivery, online travel booking, direct marketing and media services, plus web hosting among others.

4 Trends Shaping the Future of the Internet-Delivery Services Industry

Smartphone and Internet Penetration Key Catalysts: Internet is ubiquitous and the heightening usage of smartphones is changing the delivery landscape. The companies in the Zacks Internet - Delivery Services industry are benefiting from the growing number of Internet users, coupled with improvement in Internet penetration and the rapid adoption of 4G Volte technology. The emergence of 5G technology, which promises faster speed and deliverability, also bodes well for this industry.

Shifting Consumer Preferences: Shift in consumer preferences, driven by convenience and easy accessibility, is anticipated to aid the industry. Notably, the accelerated transition from offline to online food ordering, as well as the rising penetration of online travel booking augur well for industry players. Nevertheless, as higher consumer spending appetite is the main driver of the overall industry’s health, any sluggishness in the global economy will pose a risk.

Higher Upfront Costs to Hurt Profitability: Online delivery is yet to expand beyond the major metros, reflecting lower penetration and significant room for growth. Nonetheless, as expansion into the newer markets will take some time to generate volumes, higher upfront costs might erode profitability. Moreover, Amazon’s focus on strengthening its delivery system poses a key challenge to the industry players. We believe the company’s powerful distribution channels are a major force that might highly threaten the incumbents in this industry. Also, search giant Alphabet has forayed into the food delivery market, with its delivery arm Wing and an array of food delivery apps, which are likely to further intensify competition.

Pandemic-induced Lockdown to Hurt Near-Term Growth Prospects: The industry’s near-term prospects look gloomy due to the pandemic-induced global lockdown. There is travel ban in most countries, which is affecting online travel and hotel booking companies significantly. Apart from these, online food delivery companies have been hit hard as restaurant suppliers have been ordered to shut their operations. Also, as people are staying indoors, they now have more time to cook, which results in lesser requirement for outside food. Nonetheless, online travel and hotel bookings, as well as online food delivery companies are poised to bounce back once normalcy resumes.

Zacks Industry Rank Indicates Bleak Prospects

The Internet - Delivery Services industry is housed within the broader Computer and Technology sector. It carries a Zacks Industry Rank #247, which places it in the bottom 2% 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.

Despite the gloomy industry outlook, few stocks are worth watching in the market. But before we present the top industry picks, it is worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Underperforms on Stock Market Performance

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

The industry has gained 25.1% during this period compared with the S&P 500’s 42.5% rally and the broader sector’s 48.3% appreciation.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month price-to-sales (P/S), a commonly-used multiple for valuing the Internet-Delivery stocks, the industry is currently trading at 1.16X compared with the S&P 500’s 4.66X and the sector’s 4.69X.

Over the past five years, the industry has traded as high as 1.38X, as low as 0.81X and recorded a median of 1.07X as the charts below show.

Price-to-Sales Ratio (F12M)

Price-to-Sales Ratio (F12M)

3 Stocks Trying to Survive the Industry Challenges

MakeMyTrip: It is an online travel service company, which offers travel products and solutions in India and the United States. The company's services and products include air tickets, customized holiday packages, hotel booking, railway tickets, bus tickets, car hire and facilitating access to travel insurance.

MakeMyTrip is gaining substantially from improving travel conditions and reopening of the economies. In addition, recovering hotel demand as a result of a rise in short-stay getaway vacations, great travel deals and hygienically-safe properties is a major positive. Also, this Zacks Rank #3 company is optimistic regarding its cost-control initiatives, MySafety and GoSafe programs, and a strengthening hotel business. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for fiscal 2022 loss has narrowed from 48 cents to 33 cents per share in 60 days’ time.

Price and Consensus: MMYT

 

Vipshop Holdings: It is an online discount retailer for brands. The company offers branded products to consumers in China through flash sales on its vipshop.com website.

The company’s continued efforts toward strengthening product offerings and improving product procurement are aiding its financial performance, given the growing proliferation of online shopping amid the pandemic. Further, solid execution of its merchandising strategy is bolstering its active customer base.

Moreover, its successful transition to discount retailing is a major positive. This is likely to continue driving the momentum across repeated customers and help attract new ones.

Additionally, the company’s quarterly results will likely keep benefiting from its deepening focus on high-margin-generating apparel-related businesses, especially the discount apparel business. Furthermore, Vipshop’s deep discount channels are expected to bolster its online gross merchandize volumes in the quarters ahead.

Vipshop currently carries a Zacks Rank #3. The Zacks Consensus Estimate for current-year earnings has moved 3 cents north to $1.76 per share over the past 60 days.

Price and Consensus: VIPS

 

QuinStreet: It is a provider of online direct marketing and media services. The firm offers online messaging, e-mail broadcasting, search engine marketing, and brand management services.

QuinStreet is benefiting from the accelerated shift from offline to online business model across industries. Ad spending is likely to improve this year as vaccine roll-outs are providing support to countries for reopening their economic and business activities. The company is well positioned to bank on this opportunity, and acquire new customers and high-value deals.

Apart from this, last year’s divestments of the underperforming businesses, including Education media, client and campaign assets, have helped the company focus on its high-growth businesses. Furthermore, the acquisition of Modernize in July 2020 has expanded its Home Services business.

QuinStreet carries a Zacks Rank of 3, at present. The Zacks Consensus Estimate for fiscal 2021 earnings has remained unchanged at 65 cents per share in the past 60 days.

Price and Consensus: QNST

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