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Internet Content Industry Outlook Dull Amid Strict Scrutiny

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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.

Here are the three major industry themes:

  • The industry is characterized by rapid technological change, frequent product and service introductions, and evolving standards. An expanding range of mobile 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.

 

  • 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.

 

  • 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 Dull Prospects

The Zacks Internet - Content industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #212, which places it in the bottom 17% 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 solid 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 declined 11.9% over this period against the 14.6% rally in the S&P 500 and 19.9% return 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 8.32X compared with the S&P 500’s 3.58X and the sector’s trailing 12-month P/S of 3.96X.

Over the last five years, the industry has traded as high as 15.34X, as low as 3.32X and at the median of 5.45X, as the chart below shows.

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

 



Stocks to Watch Out

Here, we pick couple of stocks that either have a Zacks Rank #1 (Strong Buy) or 2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

These stocks are well positioned to grow in the near term.

Israel-based Perion Network (PERI - Free Report) provides advertising solutions. This Zacks Rank #1 stock has returned 162% over the past year. The Zacks Consensus Estimate for 2020 bottom line has increased 13.6% to 67 cents per share over the past month.

Price and Consensus: PERI






Beijing-based China Distance Education Holdings Limited (DL - Free Report) is a provider of online education and value-added services for professionals and corporate clients. The Zacks Rank #2 stock has returned 10.5% over the past year. Moreover, the Zacks Consensus Estimate for fiscal 2020 earnings has increased a penny to 89 cents per share over the past 30 days.

Price and Consensus: DL



 



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