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Internet Delivery Services Outlook: Growth Prospects Solid

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The Zacks Internet - Delivery Services Industry is benefiting from growing number of Internet users coupled with improvement in Internet penetration and rapid adoption of 4G Volte technology.   

Moreover, shift in consumer preferences driven by convenience and easy accessibility is expected to keep the momentum of the industry going.

The improving macro-economic environment provides strong support to increasing income level of consumers, which in turn boosts their willingness to spend. This is evident from the surge in demand for food delivery, online travel booking, direct marketing and media services, web hosting among others.

However, increasing expenses due to planned expansion into new delivery markets and higher consumer acquisition costs through sales and marketing are keeping margins under pressure.

Industry Returns Positive

Internet is ubiquitous and the increasing usage of smartphones is changing the delivery landscape. This is enhancing investors’ confidence in the industry’s growth prospect.

The Zacks Internet - Delivery Services Industry, within the broader Zacks Computer And Technology Sector, has outperformed both the S&P 500 and its own sector in the past year.

While the stocks in this industry have collectively gained 52.5% over the past year, the Zacks S&P 500 Composite and Zacks Computer And Technology Sector, have rallied 16.4% and 22.1% over the same time period, respectively.

One Year Price Performance

Internet Delivery Stocks Trading Cheap

With companies in the Zacks Internet – Delivery Services being mostly in their early stages, growth in revenues is more significant than growth in profits.

Increase in revenues indicates their demand and growing adoption and market share. However, being growth stage companies they are likely to spend more on research & development as well as sales & marketing, which makes it harder to report profits.

Hence, one might therefore get a good handle on the industry’s relative valuation by looking at its price-to-sales ratio (P/S), which essentially shows how much an investor is willing to pay for each unit of sales.

Notably, a lower P/S ratio is always better.

The Internet – Delivery Services industry’s valuation looks cheap at the moment. The industry currently has a TTM P/S ratio of 1.69X, which looks inexpensive when compared with the market at large, as the TTM P/S ratio for the S&P 500 is 3.38X.

Price-to-Sales Ratio (TTM)

Moreover, a comparison of the group’s P/S ratio with that of its broader sector shows that the group is trading at a significant discount. The Zacks Computer And Technology Sector’s TTM P/S ratio of 3.64X and the one-year median level of 3.55X for the same period are way above the Zacks Internet Delivery Industry’s respective ratios.

Price-to-Sales Ratio (TTM)

Improving Earnings Outlook to Drive Outperformance

Efforts to make the services more convenient and effective cost management initiatives are likely to help Internet Delivery Services stocks generate positive shareholder returns in the near future.

However, what really matters to investors is whether this group has the potential to perform better than the broader market in the quarters ahead.

One reliable measure that can help investors understand the industry’s prospects for a solid price performance going forward is its earnings outlook. Empirical research shows that earnings outlook for the industry, a reflection of the earnings revisions trend for the constituent companies, has a direct bearing on its stock market performance.

The Price & Consensus chart for the industry shows the market's evolving bottom-up earnings expectations for it and the industry's aggregate stock market performance

This becomes even clearer by focusing on the aggregate bottom-up EPS revisions trend. The chart below shows the evolution of aggregate consensus expectations for 2018.

Price and Consensus: Zacks Internet Delivery Services Industry

The consensus earnings estimate for the Zacks Internet – Delivery Services industry is pegged at a loss 27 cents per share. However, it has shown decent improvement since February 2018. Moreover, the trend in earnings estimate revisions is positive, with the industry's aggregate loss estimate narrowing over time.

Current Fiscal Year EPS Estimate Revisions

Zacks Industry Rank Indicates Good Prospects

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term.

The Zacks Internet – Delivery Services industry currently carries a Zacks Industry Rank #88, which places it at the top 34% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Our proprietary Heat Map shows that the industry’s rank has improved considerably over the past six weeks.

Long-Term Growth Prospects Strong

The emergence of 5G technology that promises a rapid improvement in speed and deliverability bodes well for this industry.

The game play for the industry is expected to remain positive owing to the shift in consumer behavior pertaining to selection, acquisition and consumption of goods and services to meet their needs.

The long-term (3-5 years) EPS growth estimate for the Zacks Internet Delivery Services industry appears promising. The group’s mean estimate of long-term EPS growth rate has remained steady since April 2018 to reach the current level of 21.92%. This compares to 9.8% for the Zacks S&P 500 composite.

Mean Estimate of Long-Term EPS Growth Rate

In fact, the basis of this long-terms EPS growth could be a steady top line that Zacks Internet – Delivery Services has been showing since 2012.

Bottom Line

Rising Internet penetration in the emerging markets, a burgeoning affluent middle class, and rapid adoption of smartphones will continue to help the Zacks Internet – Delivery Services industry in the long haul.

A key growth driver for the industry has been the robust shift from offline to online food ordering, especially among millennials. Restaurants, on their part, have difficulties delivering food on their own and are therefore looking for alternative sales channels to reach customers.

However, as expansion in new markets will take some time to generate volumes, higher upfront costs will remain an overhang on profitability. Moreover, any sluggishness in global economy could dampen the industry’s prospects as higher consumer spending appetite is the main driver of the overall health of the industry.

There are a couple of stocks in the Zacks Internet - Delivery Services industry that investors can acquire given their solid growth prospects. These have either a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Chicago-based GrubHub Inc. (GRUB - Free Report) is a leading online and mobile food ordering company. The company's platform assists diners in their search for local restaurants, helps them to track orders and re-order for convenience. The company has an average four-quarter positive earnings surprise of 20.12%.

GrubHub Inc. Price and Consensus

Gurgaon, India-based MakeMyTrip Limited (MMYT - Free Report) is an online travel service company, which offers travel products and solutions in India and the United States. The company has an average four-quarter positive earnings surprise of 16.62%.

MakeMyTrip Limited Price and Consensus

However, there is one stock that investors can hold on to given the positive fundamentals and strong growth prospects of the industry.

Headquartered in Scottsdale, AZ GoDaddy Inc.(GDDY - Free Report) is engaged in the designing and development of cloud-based technology products for small businesses, web design professionals and individuals. The company has an average four-quarter positive earnings surprise of 88.89%.

GoDaddy Inc. Price and Consensus

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