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3 Internet Delivery Stocks to Watch in a Battered Industry

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The COVID-19 pandemic-induced travel restrictions and social-distancing measures imposed by governments across the world have been hurting the Zacks Internet - Delivery Services industry. Nonetheless, a recovery is anticipated for companies like GoDaddy (GDDY - Free Report) , MakeMyTrip (MMYT - Free Report) and QuinStreet (QNST - Free Report) , as the countries are slowly reopening their economies and lifting the travel bans. Additionally, a greater internet presence in the emerging markets, a burgeoning affluent middle class and the accelerated uptake of smartphones will aid participants in the Internet – Delivery Services industry. However, elevated marketing expenses due to the planned expansion into new delivery markets will be an overhang on margins in the near term. Moreover, the emergence of the Delta variant strain and spike in the infection rates across several parts of the world, resulting in stringent lockdowns, might affect the recovery of the industry players. Also, lingering impacts of the pandemic-led business volatility are a concern.

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. Some companies in this space offer Internet domain registration and web hosting registration as well as sell e-business related software and services. Few industry participants provide air and train ticket bookings, customized holiday packages, hotel booking, bus tickets and car hire services. Some players offer online direct marketing and media services, including online messaging, email broadcasting, search engine marketing, and brand management facilities. Being growth-stage companies, industry participants are spending more on R&D and sales & marketing, thereby, making it difficult to generate profits in the near term.

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 an improvement in Internet penetration and the rapid adoption of the 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 a 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, underlining lower penetration and significant room for growth. Nevertheless, 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 is a key challenge for 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.

Evolving COVID-19 Situation to Hurt Near-Term Growth Prospects: The industry’s near-term prospects look gloomy due to the pandemic-induced social-distancing measures adopted by governments across the globe. There are travel restrictions in most countries, which are affecting the online travel and hotel booking companies significantly. Apart from these, the online food delivery companies have been hit hard as restaurant suppliers across several parts of the world have been ordered to shut their operations. In addition, as people are staying indoors, they now have more time to cook, which results in lesser requirement for outside food. Furthermore, with the emergence of the more contagious coronavirus variant — Delta — several parts of the world, including India, Australia, Indonesia and Japan, are grappling with a massive spike in infection rates, leading to stringent lockdowns. Even some parts of the United States are witnessing the Delta variant outbreaks. This could result in further restrictions on travel and hotel openings. The uncertainty in business visibility might dent the industry’s performance in the upcoming period. 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 #231, which places it in the bottom 8% 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 in the year-to-date period.

The industry has lost 35.6% during this period, while the S&P 500 and the broader sector gained 19.9% and 24.7%, respectively.

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 0.72X compared with the S&P 500’s 4.53X and the sector’s 5.00X.

Over the past five years, the industry has traded as high as 1.29X, as low as 0.71X and recorded a median of 0.91X as the charts below show.

Price-to-Sales Ratio (F12M)

Price-to-Sales Ratio (F12M)

3 Stocks to Watch Out For

GoDaddy: It is an Internet domain registrar and web hosting company that also sells e-business-related software and services. This Zacks Rank #3 (Hold) company is engaged in the designing and development of cloud-based technology products for small businesses, Web design professionals and individuals. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

GoDaddy thrives on the growing adoption of its domain products. Higher subscriptions to Websites and Marketing, and managed WordPress offerings, international expansion, robust feature engagements and strength in GoCentral are tailwinds for the company’s Hosting and Presence business.

Additionally, the acquisition of payments processor firm Poynt has fortified GoDaddy’s commerce offerings and provided it an edge over its competitor, Shopify. Furthermore, the acquisition of Neustar’s Registry business last year has made the company one of the largest players in the Internet infrastructure industry.

The Zacks Consensus Estimate for 2021 earnings has moved 12 cents north to $1.09 per share over the past 30 days.

Price and Consensus: GDDY

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 the improving travel conditions and reopening of the economies. In addition, the recovering hotel demand, as a result of the 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.

The Zacks Consensus Estimate for fiscal 2022 earnings has been revised upward by 2 cents to 10 cents per share in 60 days’ time.

Price and Consensus: MMYT

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 the 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 the 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 2022 earnings has been revised upward by a penny to 81 cents per share in the past 30 days.

Price and Consensus: QNST

In-Depth Zacks Research for the Tickers Above

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MakeMyTrip Limited (MMYT) - free report >>

QuinStreet, Inc. (QNST) - free report >>

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