Macro factors currently driving the economy, such as inflation, rate hikes, supply chain issues (though currently minimal), relative labor strength, etc., have a varying impact on players in the highly diverse Internet services industry.
However, since this is a capital-intensive industry with high fixed operating cost and relatively constant need for capacity expansion, high interest rates are not very beneficial. Nor is a lingering recession or at least a slowdown expected, as the industry tends to do better when the overall economy is good. These factors affect the stock as a whole. Valuations continue to decline, creating opportunities.
Our picks are Uber (UBER – Free report (Crexendo)CXDO – Free Report) and DoorDash (DASH).
About the industry
This industry mainly includes internet information providers such as Facebook Inc. (FB) becomes.
Factors shaping the industry
- It goes without saying that the increasing digitization of various aspects of daily life is a driver for the entire industry as digitization essentially moves work online, where Internet service providers are needed. To this extent, the pandemic has proven to be a game-changer for the industry due to the sheer volume of transactions taking place online. And people don’t give up all these comforts to go back to their old ways. Expanding the installed base of connected devices beyond PCs and smartphones to the Internet of Things, automotive and more will create additional cases. Opportunities for goal setting. Owning multiple devices automatically leads people to use these services more as they increasingly automate everyday tasks.
- As a capital-intensive industry, there is always a need to raise capital to build and maintain costly infrastructure. companies have Dropped Capital spend Given rising rates and a possible recession, which if it happens in late 2023 or 2024, will affect revenue growth and thus cost absorption. So, while cost reductions should be seen as a positive in terms of cost control, they also imply a reduction in demand, which is not so positive.
- Debt levels It’s been relatively flat this year, easing slightly in the March quarter as Alphabet’s debt levels eased. Two things usually cause major increases in debt levels (and the two are not mutually exclusive), namely fixed asset investment and acquisitions. The 2023 capital spending trend seems unexceptional. Following the seasonal dip in December, March and June followed the patterns of previous years. However, as seen from the balance of total intangible assets, appetite for purchases appears to be low. The outlook for soft demand coupled with signs of a further rate hike this year could be a disruptive play. Alphabet, which is gobbling up smaller players in its daily business, seems to be going slow this year as well.
- traffic acquisition It is one of the most important drivers of revenue, so companies invest in advertising or building communities that can attract more users to their online properties and make them spend more time there, just like a store owner trying to attract a potential buyer. keep it inside. Store. Some large players, including those that provide infrastructure services, grow by linking up with other large players to reach their customers. Since there is no personal touch in an online store, many rely on cookies and other technologies to track users, collect data about them, and profile them to better understand their needs.
- As these companies have grown over time, some have collected so much information about their users that the data itself now helps them build. Artificial intelligence (AI) for monetization of new technologies and services as well as reducing operating costs. Ad-based services are no longer considered free. For example, the EU GDPR and the CCPA (California Consumer Privacy Act) require service providers to obtain explicit permission from users before collecting user data. While not all businesses are built to the same scale or have the same customer reach, AI tools are increasingly helping organizations of all sizes. They tremendously increase operational efficiency and scope for growth.
Zacks Industry Rank remains positive
The Zacks Internet Services industry is included within the broader Zacks Computer & Technology sector. The industry has a Zacks Industry Rank of 70, which places it in the top 28% of over 250 industries classified by Zacks.
The group’s Zacks Industry Rank, which is essentially the average of all member stocks, indicates that there are numerous opportunities in this space. However, the diverse range of companies makes stock selection difficult.
Looking at gross profit estimate revisions over the past year, we see a low in March followed by a more or less steady climb from April. Overall, the industry’s revenue estimate for 2023 has increased by 11.3% compared to October 2022. The average revenue estimate for 2024 has increased by 6.5 percent.
Historically, the top 50% of Zacks Rank industries outperform the bottom 50% by more than 2-to-1. Therefore, the industry’s position in the 50% of Zacks Rank industries should be considered positive, even if the recession, however shallow it seems, is around.
Before presenting some stocks you might want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry leads in stock market performance
While it initially traded more or less in line with the broader tech sector and the S&P 500, it outperformed the S&P 500 in March. Since then it has traded more or less in line with the broader industry, sometimes leading and sometimes lagging behind. A sharp drop in prices has occurred in the last week of October, possibly linked to the possibility of another rate hike, which will increase the cost of the industry.
Despite the recent softness, the industry grew a net 28.9% last year, while the broader sector gained 25.2% and the S&P 500 gained 6.9%.
Due to the trend of positive estimate corrections, price pullbacks indicate a buying opportunity.
One-year price performance
Current industry valuation
Based on the trailing 12-month price-to-earnings (P/E) ratio, we see that the industry is currently trading at a multiple of 19.66x, which is lower than its average value of 21.28x over the past year. Although it beats the S&P 500’s 17.50X, it’s still a discount to the sector’s 21.7X.
12-month price-to-earnings (P/E) ratio.
3 solid conditions
Of the three stocks selected today, Uber Technologies has a Zacks Rank #1 (Strong Buy), while the rest are ranked #2 (Buy).
Uber, Inc.UBER – free report) : Uber Technologies, based in San Francisco, California, offers ride-hailing, food delivery, and transportation (renting vehicles to third parties) services through its Mobility, Delivery, and Freight divisions, respectively. This company operates throughout America, Europe, Middle East and Asia.
Both ride-sharing and its platforms are growing in popularity. This is driving strong demand, which, along with new growth initiatives and continued cost discipline, is driving the company’s results. In the last reported quarter, trips rose 22 percent, allowing it to post its first GAAP operating profit.
The company posted strong results last quarter that beat previous analyst estimates. Earnings of 18 cents were well ahead of the estimate of a loss of one cent, while revenue of $9.23 billion missed analysts’ estimates by less than 1 percent. Estimates for both 2023 and 2024 have dropped a penny each in the past 30 days. Analysts currently expect revenue and earnings to grow 17.4% and 108.8% in 2023, respectively. For 2024, they expect 17.8% revenue growth and 160.8% revenue growth.
Shares of this Zacks Number 1 (Strong Buy) stock are up 55.1% over the past year.
Price and agreement: UBER
Crexendo, Inc.CXDO – free report) Tempe, Arizona-based Crexendo is a provider of unified communications as a service (UCaaS), contact center as a service (CCaaS), communications platform software solutions, and collaboration services designed to deliver enterprise-class cloud communications solutions for businesses of all sizes. has been Through our business partners, agents and direct channels.
Crexendo beat estimates last quarter. Its earnings were up about 7%, while earnings were up 125% (the company earned a penny instead of the 4 cents loss expected by analysts). Estimates for 2023 and 2024 have not changed in the last 60 days. At these levels, they represent a 35.9% increase in revenue and a 25% decrease in revenue for 2023. Revenue and earnings are expected to grow 7.7% and 45.8% respectively next year.
This Zacks Rank #2 (Buy) stock is up 55.1% year-to-date.
Price and agreement: CXDO
DoorDash, Inc. (DASH): San Francisco, California-based logistics platform DoorDash connects merchants, consumers and delivery personnel (dashers) in the United States and internationally. Its DoorDash and Wolt marketplaces provide merchants with tools for customer acquisition, delivery, insights and analytics, commerce, payment processing and customer support. DashPass and Wolt+ are membership products, and the white-label delivery services of DoorDash Drive and Wolt Drive. It also offers DoorDash merchants Storefront for e-commerce and Bbot for digital ordering and payment solutions (both for in-store and online sales).
DoorDash is benefiting from strong demand in its core restaurant business, in its food delivery business, as well as in several international markets, and management believes the company is gaining share. International trade is also much stronger than domestic trade and the main driver of its results. The company is also improving operational efficiency in many areas of its business, including through systematic cost management.
DoorDash’s June quarter results showed its best performance in terms of orders, GOV and revenue. Despite a 4.8% price loss, the quarterly loss of 44 cents was a big improvement from last year’s loss of 72 cents. Revenue was 4.2% better than estimated and increased by 32.6% compared to the previous year. Over the past seven days, the 2023 loss estimate has dropped a penny, while the 2024 estimate has dropped 3 cents. At current levels, top line estimates indicate growth of 27.9% in 2023, followed by 18.1% growth in 2024. Bottom line estimates show a 33.2 percent improvement in 2023 and a 47.5 percent improvement in 2024.
In the last year, the stock price of this second ranked company (Buy) has increased by 62.3%.
Price and settlement: DASH
Zacks Names “Single Best Pick to Double”
Out of thousands of stocks, 5 Zacks experts have each picked their favorites to rise 100% or more in the coming months. Among these 5 people, the research director of Shiraz Mian chooses the one who has the most explosive aspect.
It is known as a “watershed medical breakthrough” and is developing a busy pipeline of other projects that could make a world of difference to patients with diseases of the liver, lungs and blood. This is a timely investment that you can get while it is coming out of its bear market lows.
It could rival or surpass the likes of Boston Brewing Company, which rose +143.0% in less than 9 months, and NVIDIA, which rose 175.9% in a year.
Free: See our top stocks and 4 runners-up
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