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3 Picks from the Still-Strong Internet Services Industry
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Macro factors currently driving the economy, such as inflation, rate hikes, supply chain issues (though minimal right now and in pockets), the relative strength in labor and so forth have a varied impact on players in the extremely diverse Internet – Services industry.
However, since this is a capital-intensive industry with high fixed cost of operation and the fairly constant need to expand capacity, a high interest rate just isn’t very phelpful. Nor is a pending recession, or at least slowdown, since the industry tends to do better when the overall economy does well. These factors, in combination, are weighing on stocks. Valuations continue to drop, creating some opportunities.
This industry includes mostly internet information providers like Facebook Inc. (FB).
Factors Shaping the Industry
It goes without saying that increased digitization of different aspects of daily life is a driver for the entire industry because digitization essentially transfers work online, which is where Internet service providers are required. To that extent, the pandemic has proved course-altering for the industry because of the huge volume of transactions that moved online. And people are not giving up all of these conveniences to go back to their old ways. The expansion of the installed base of connected devices beyond PCs and smartphones to IoT, automotive and more is creating additional opportunities for targeting. The ownership of multiple devices automatically drives people to use these services more as they increasingly automate routine chores.
Being a capital-intensive industry, there is always the need to raise funds to build out and maintain costly infrastructure. Companies have scaled backcapitalspending in view of rising rates and a possible recession, which if it happens in late 2023 or 2024, will impact revenue growth and, therefore, cost absorption. Therefore, while cutbacks in spending should be viewed positively in terms of cost control, they also imply softening demand, which isn’t so positive.
Debt levels have been relatively steady this year, coming down slightly in the March quarter, as Alphabet’s debt levels were lowered. Two things typically trigger major increases in debt levels (and the two are not mutually exclusive), i.e. fixed-asset investment and acquisitions. The 2023 capital spending trend looks non-exceptional. Following the seasonal dip in December, March and June followed patterns in earlier years. The appetite for acquisitions appears to be low, however, as seen from the aggregated intangibles balance. The soft demand outlook combined with indications of one more rate hike this year could be playing spoilsport. Alphabet, for which swallowing smaller players is all in the day’s work, also appears to be going slow this year.
Traffic acquisitionc 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 generate revenues from new technologies and services and also lower the cost of operation. Ad-based services are no longer considered free. The EU’s GDPR and the CCPA (California Consumer Privacy Act), for example, require service providers to acquire explicit permission from users before collecting their data. While not all businesses are built on the same scale or have the same customer reach, AI tools are increasingly helping organizations of every size. They are tremendously increasing operational efficiency and the scope for growth.
Zacks Industry Rank Remains Positive
The Zacks Internet - Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #70, which places it among the top 28% of more than 250 Zacks-classified industries.
The group’s Zacks Industry Rank, which is basically the average rank of all the member stocks, indicates that there are several opportunities in the space. However, the diverse range of companies makes stock selection tricky.
Looking at the aggregate earnings estimate revisions over the past year, we see the bottom in March followed by a more or less steady climb back up from April. Overall, the industry’s earnings estimate for 2023 is up 11.3% from October 2022. The average earnings estimate for 2024 is up 6.5%.
Historically, the top 50% of Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. So the industry’s positioning in the top 50% of the Zacks-ranked industries should be considered a positive, even if a recession, albeit a shallow one appears to be around the corner.
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
While initially trading more or less in line with the broader Technology sector and the S&P 500, it pulled ahead of the S&P 500 in March. It has been trading more or less in line with the broader industry since then, at times taking the lead and at other times dropping back behind. There has been a sharp pullback in prices in the last week of October, most probably linked to the possibility of another rate hike, which would increase cost for this industry.
Despite the recent softness, the industry gained a net 28.9% in the past year while the broader sector gained 25.2% and the S&P 500 6.9%.
Given the positive estimate revisions trend, the pullback in prices signals an opportunity to buy.
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, we see that the industry is currently trading at a 19.66X multiple, which is below its median value of 21.28X over the past year. Although a premium to the S&P 500’s 17.50X it is still a discount to the sector’s 21.7X.
Forward 12 Month Price-to-Earnings (P/E) Ratio
Image Source: Zacks Investment Research
3 Solid Bets
Of the three stocks selected today, Uber Technologies carries a Zacks #1 (Strong Buy) rank, while the others are ranked #2 (Buy).
Uber, Inc. (UBER - Free Report) : San Francisco, California-based Uber Technologies provides ride-hailing, food delivery and freight (leasing vehicles to third parties) services through its Mobility, Delivery and Freight segments, respectively. The company operates across the Americas, Europe, Middle East and Asia.
Both its ride-sharing and platforms are growing in popularity. This is generating strong demand, which along with new growth initiatives and continued cost discipline are driving the company’s results. In the last-reported quarter, trips were up 22%, allowing it to post its first GAAP operating profit.
The company posted strong results in the last quarter, blowing past analyst estimates. Its 18-cent earnings were well ahead of the estimated loss of a cent while its revenue of $9.23 billion missed analyst estimates by less than a percentage point. Estimates for both 2023 and 2024 are down a penny each in the last 30 days. Analysts currently expect 2023 revenue and earnings growth of 17.4% and 108.8%, respectively. For 2024, they’re expecting 17.8% revenue growth and 160.8% earnings growth.
The shares of this Zacks Rank #1 (Strong Buy) stock are up 55.1% over the past year.
Price and Consensus: UBER
Image Source: Zacks Investment Research
Crexendo, Inc. (CXDO - Free Report) : Tempe, Arizona-based Crexendo is a provider of Unified Communications as a Service (UCaaS), Call Center as a Service (CCaaS), communication platform software solutions, and collaboration services designed to provide enterprise-class cloud communication solutions to any size business through their business partners, agents, and direct channels.
Crexendo topped estimates in the last quarter. Its revenue beat by around 7% while earnings beat by 125% (the company earned a penny instead of the 4-cent loss estimated by analysts). The 2023 and 2024 estimates have not changed in the last 60 days. At these levels, they represent a 35.9% increase in revenue and a 25% decrease in earnings for 2023. Revenue and earnings are expected to grow a respective 7.7% and 45.8% the following year.
The shares of this Zacks Rank #2 (Buy) stock are up 55.1% over the past year.
Price and Consensus: CXDO
Image Source: Zacks Investment Research
DoorDash, Inc. (DASH): San Francisco, California-based DoorDash’s logistics platform connects merchants, consumers and delivery personnel (dashers) in the U.S. and internationally. Its DoorDash and Wolt marketplaces offer merchants the tools for customer acquisition, delivery, insights and analytics, merchandising, payment processing and customer support; The DashPass and Wolt+ are membership products, and DoorDash Drive and Wolt Drive white-label delivery fulfillment services. It also offers merchants DoorDash Storefront for e-commerce and Bbot for digital ordering and payment solutions (for both in-store and online sales).
DoorDash is benefiting from strong demand in the core restaurant business, in the grocery delivery business, as well as in several international markets, and management believes that the company is taking share. The international business is also much stronger than the domestic and a major driver of its results. The company is also improving operating efficiency in many areas of its business, including through disciplined expense management.
DoorDash’s June quarter results constituted its best ever performance in terms of orders, GOV and revenue. Although there was a 4.8% miss on the bottom line, the quarterly loss of 44 cents was a big improvement over the year-ago loss of 72 cents. Revenue came in 4.2% better than estimated and was up 32.6% year over year. In the last seven days, the 2023 loss estimates has dropped by a penny while the 2024 estimate has dropped by 3 cents. At current levels, top line estimates represent 27.9% growth in 2023 followed by 18.1% growth in 2024. Bottom line estimates represent 33.2% improvement in 2023 and 47.5% improvement in 2024.
In the past year, share prices of this #2 (Buy)-ranked company have jumped 62.3%.
Price and Consensus: DASH
Image Source: Zacks Investment Research
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3 Picks from the Still-Strong Internet Services Industry
Macro factors currently driving the economy, such as inflation, rate hikes, supply chain issues (though minimal right now and in pockets), the relative strength in labor and so forth have a varied impact on players in the extremely diverse Internet – Services industry.
However, since this is a capital-intensive industry with high fixed cost of operation and the fairly constant need to expand capacity, a high interest rate just isn’t very phelpful. Nor is a pending recession, or at least slowdown, since the industry tends to do better when the overall economy does well. These factors, in combination, are weighing on stocks. Valuations continue to drop, creating some opportunities.
Our picks are Uber (UBER - Free Report) , Crexendo (CXDO - Free Report) and DoorDash (DASH).
About the Industry
This industry includes mostly internet information providers like Facebook Inc. (FB).
Factors Shaping the Industry
Zacks Industry Rank Remains Positive
The Zacks Internet - Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #70, which places it among the top 28% of more than 250 Zacks-classified industries.
The group’s Zacks Industry Rank, which is basically the average rank of all the member stocks, indicates that there are several opportunities in the space. However, the diverse range of companies makes stock selection tricky.
Looking at the aggregate earnings estimate revisions over the past year, we see the bottom in March followed by a more or less steady climb back up from April. Overall, the industry’s earnings estimate for 2023 is up 11.3% from October 2022. The average earnings estimate for 2024 is up 6.5%.
Historically, the top 50% of Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. So the industry’s positioning in the top 50% of the Zacks-ranked industries should be considered a positive, even if a recession, albeit a shallow one appears to be around the corner.
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
While initially trading more or less in line with the broader Technology sector and the S&P 500, it pulled ahead of the S&P 500 in March. It has been trading more or less in line with the broader industry since then, at times taking the lead and at other times dropping back behind. There has been a sharp pullback in prices in the last week of October, most probably linked to the possibility of another rate hike, which would increase cost for this industry.
Despite the recent softness, the industry gained a net 28.9% in the past year while the broader sector gained 25.2% and the S&P 500 6.9%.
Given the positive estimate revisions trend, the pullback in prices signals an opportunity to buy.
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, we see that the industry is currently trading at a 19.66X multiple, which is below its median value of 21.28X over the past year. Although a premium to the S&P 500’s 17.50X it is still a discount to the sector’s 21.7X.
Forward 12 Month Price-to-Earnings (P/E) Ratio
Image Source: Zacks Investment Research
3 Solid Bets
Of the three stocks selected today, Uber Technologies carries a Zacks #1 (Strong Buy) rank, while the others are ranked #2 (Buy).
Uber, Inc. (UBER - Free Report) : San Francisco, California-based Uber Technologies provides ride-hailing, food delivery and freight (leasing vehicles to third parties) services through its Mobility, Delivery and Freight segments, respectively. The company operates across the Americas, Europe, Middle East and Asia.
Both its ride-sharing and platforms are growing in popularity. This is generating strong demand, which along with new growth initiatives and continued cost discipline are driving the company’s results. In the last-reported quarter, trips were up 22%, allowing it to post its first GAAP operating profit.
The company posted strong results in the last quarter, blowing past analyst estimates. Its 18-cent earnings were well ahead of the estimated loss of a cent while its revenue of $9.23 billion missed analyst estimates by less than a percentage point. Estimates for both 2023 and 2024 are down a penny each in the last 30 days. Analysts currently expect 2023 revenue and earnings growth of 17.4% and 108.8%, respectively. For 2024, they’re expecting 17.8% revenue growth and 160.8% earnings growth.
The shares of this Zacks Rank #1 (Strong Buy) stock are up 55.1% over the past year.
Price and Consensus: UBER
Image Source: Zacks Investment Research
Crexendo, Inc. (CXDO - Free Report) : Tempe, Arizona-based Crexendo is a provider of Unified Communications as a Service (UCaaS), Call Center as a Service (CCaaS), communication platform software solutions, and collaboration services designed to provide enterprise-class cloud communication solutions to any size business through their business partners, agents, and direct channels.
Crexendo topped estimates in the last quarter. Its revenue beat by around 7% while earnings beat by 125% (the company earned a penny instead of the 4-cent loss estimated by analysts). The 2023 and 2024 estimates have not changed in the last 60 days. At these levels, they represent a 35.9% increase in revenue and a 25% decrease in earnings for 2023. Revenue and earnings are expected to grow a respective 7.7% and 45.8% the following year.
The shares of this Zacks Rank #2 (Buy) stock are up 55.1% over the past year.
Price and Consensus: CXDO
Image Source: Zacks Investment Research
DoorDash, Inc. (DASH): San Francisco, California-based DoorDash’s logistics platform connects merchants, consumers and delivery personnel (dashers) in the U.S. and internationally. Its DoorDash and Wolt marketplaces offer merchants the tools for customer acquisition, delivery, insights and analytics, merchandising, payment processing and customer support; The DashPass and Wolt+ are membership products, and DoorDash Drive and Wolt Drive white-label delivery fulfillment services. It also offers merchants DoorDash Storefront for e-commerce and Bbot for digital ordering and payment solutions (for both in-store and online sales).
DoorDash is benefiting from strong demand in the core restaurant business, in the grocery delivery business, as well as in several international markets, and management believes that the company is taking share. The international business is also much stronger than the domestic and a major driver of its results. The company is also improving operating efficiency in many areas of its business, including through disciplined expense management.
DoorDash’s June quarter results constituted its best ever performance in terms of orders, GOV and revenue. Although there was a 4.8% miss on the bottom line, the quarterly loss of 44 cents was a big improvement over the year-ago loss of 72 cents. Revenue came in 4.2% better than estimated and was up 32.6% year over year. In the last seven days, the 2023 loss estimates has dropped by a penny while the 2024 estimate has dropped by 3 cents. At current levels, top line estimates represent 27.9% growth in 2023 followed by 18.1% growth in 2024. Bottom line estimates represent 33.2% improvement in 2023 and 47.5% improvement in 2024.
In the past year, share prices of this #2 (Buy)-ranked company have jumped 62.3%.
Price and Consensus: DASH
Image Source: Zacks Investment Research