For Immediate Release
Chicago, IL – February 17, 2023 – Today, Zacks Equity Research discusses Autohome Inc. (
ATHM Quick Quote ATHM - Free Report) and Baidu Inc. ( BIDU Quick Quote BIDU - Free Report) . Industry: Internet Services Link: https://www.zacks.com/commentary/2055566/2-solid-bets-on-the-struggling-internet-services-industry
Macro factors currently driving the economy, such as inflation, rate hikes, supply chain issues, 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 costs of operation and the fairly constant need to expand capacity, rate hikes just aren't very positive for it. This along with still-elevated inflation and ongoing concerns about a recession in the offing is weighing on stocks. Valuations dropped through 2022, creating some opportunities. 2023 is faring better, especially after the first earnings reports started coming in. About the Industry
Internet - Services companies are primarily those that rely on huge software and hardware infrastructure, referred to as their properties, to deliver various services to consumers. People can avail the services by accessing these properties with their personal connected devices from almost anywhere in the world.
Companies in the sector generally operate two models: ad-based, where the service is offered free, and ad-free, where they charge for the service. Alphabet, Baidu and Akamai are some of the larger players while Dropbox, Etsy, Shopify, Uber, Lyft and Trivago are some of the emerging ones.
Because of the diversity of services offered, it is difficult to identify industrywide factors that could affect all players. Macro factors such as inflation, rate hikes, supply chain issues and so forth affect different players differently
Factors Shaping The Industry Being a capital-intensive industry, there is the need to raise funds to build out costly infrastructure. Funds are also needed to maintain this infrastructure. Therefore, the rising interest rate environment, which increases operating cost is a net negative for the industry. This will continue to hurt the outlook in the near to medium term. Moreover, in the event of a recession, which could hit in the second half of 2023 or in 2024, revenue growth and therefore, cost absorption will be tougher for industry players. 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. Revenue growth languished in the first three quarters of 2022, but is likely to show a bounce-back in the fourth quarter, in line with Alphabet's growth. Alphabet's numbers disproportionately impact the group's performance, because of its colossal size when compared to most of the other players in the industry. 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. Debt levels have been stabilizing in the last few quarters, after the surge in the June 2020 quarter. But investment in fixed assets continues at an accelerated pace, as the industry adjusts to a higher level of business, post pandemic. Acquisitions also remain on the agenda, as acquiring new competencies is essential to stay ahead of some of the stiff competition in the space. In 2022, Alphabet alone acquired 257 organizations. Traffic acquisition 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. As a result, ad-based services are no longer considered free in some parts of the world and the EU in particular has framed a complex law in GDPR that requires 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, the scope for growth is huge. For companies that are already pursuing research in AI, the prospects are even brighter. Zacks Industry Rank Indicates A Murky Outlook
Internet - Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #156, which places it among the bottom 38% 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 likely to be few opportunities in the space. But the diverse range of companies means that stock selection is still possible.
Looking at the aggregate earnings estimate revisions over the past year, we see steady decreases, the most significant of which were in July and then again in October, most likely because of the Fed's hawkish stance and fears of an impending recession. Additionally, the inclusion of certain larger companies like Alphabet in the group can skew averages. Overall, the industry's earnings estimate for 2022 is down 26.4% from February 2022. The average earnings estimate for 2023 is down 20.2%.
Historically, the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. So the industry's positioning in the bottom 50% of the Zacks-ranked industries should be considered a negative, even if a recession is not a done deal and there are several factors indicating that it may not be too deep.
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 Stock Market Performance
Over the past year, the industry has traded at a discount to the S&P 500 and more or less in line with the broader Zacks Computer and Technology Sector.
The industry has lost 30.7% of its value over this period compared to the S&P 500 index's loss of 9.2% and broader sector's loss of 17.8%.
Industry's Current Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, which is a commonly used multiple for valuing technology companies, we see that the industry is currently trading at a 19.70X multiple, which is a discount to its median value of 20.91X over the past year. However, this is a premium to the S&P 500's 18.64X as well as the sector's 22.74X, suggesting a rich valuation.
2 Solid Bets Autohome Inc. : Headquartered in Beijing, PRC, Autohome operates an online platform for automobile dealers and consumers. The company offers consumers interactive content and tools to research, collect discounts and offers, and buy automobiles through its three websites, autohome.com.cn, che168.com, and ttpai.cn and the Autohome Mall platform. It offers subscription, advertising, listing, data products and other platform-based services to dealers. It also facilitates bidding for used vehicles and auto financing and insurance.
Autohome's success comes from its focus on a one-stop, closed-loop ecosystem, which has increased its resilience even in the face of lockdowns in China and expanded its user reach to record levels. It is also leveraging its brands to promote video-based content. On the dealer side, it saw particular strength in the last quarter in new energy vehicles (NEVs) and data products.
Autohome beat the December quarter earnings estimate by 18.0% on revenue that beat by 3.2%. In the last 7 days, analysts have raised their 2023 estimate by 9 cents (3.6%). Analysts currently expect 2023 revenue and earnings growth of 4.3% and 6.3%, respectively.
The shares of this Zacks Rank #1 (Strong Buy) stock are up 24.7% over the past year.
Baidu Inc. : Beijing based Baidu offers search, feed, short video, marketing and other web and app-based services in China. It also offers various PaaS, SaaS, and IaaS based cloud services and solutions; self-driving services, including maps, automated valet parking, autonomous navigation pilot; electric vehicles, and robotaxi fleets, as well as Xiaodu smart devices. Further, the company provides iQIYI, an online entertainment service, including original and licensed content; other video content and membership; and online advertising services. Baidu, Inc. has strategic partnership with Zhejiang Geely Holding Group.
Through 2022, Baidu saw gradual recovery in its online marketing business, steady growth in its AI Cloud revenue, as well as significant progress in intelligent driving. Apollo Go, its ride hailing service is being scaled up with good results. And its mobile ecosystem is expected to continue generating strong cash flow to fund its investment in AI Cloud and intelligent driving, which will help maintain its leadership in the new AI business and drive long term business growth
Baidu is yet to report December quarter results but analysts appear optimistic given that its estimates are on the rise. For 2023, analysts are expecting revenue and earnings growth of a respective 9.7% and 34.6%.
The shares of this #1-ranked company are down 10.4% over the past year.
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