3 Internet Stocks to Watch From a Challenging Industry
The Zacks Internet – Content industry has been suffering from the reversal of the pandemic-led trends, along with challenging macroeconomic conditions globally. Persistent inflation and higher interest rates are having a detrimental effect on ad spending, the primary revenue source for the industry participants. The ongoing war between Russia and Ukraine, as well as in Israel, has been an overhang on the prospects of the industry participants. However, participants like Airbnb ABNB, Perion Network PERI and Similarweb SMWB are benefiting from solid demand for digital offerings, as well as the increasing importance of video content and cloud-based applications. These companies are also expanding their presence across social media, display and connected TV, and search, driving top-line growth.
Industry Description
The Zacks Internet – Content industry comprises providers of video encoding platforms, personal services, Internet content and information, staffing and outsourcing services, publishing, capital markets, media-based, home service, digital insights and measurement, stock photo, video and music licensing, and online travel companies. The industry is witnessing a rapid change in consumer behavior and ongoing digitalization. Advertising is a major revenue source for industry participants. Therefore, these companies are trying to expand their digital presence to win customers. They are also expanding their presence across social media, display and connected TV, and search. Apart from the United States, a number of companies in this industry are located in Israel, the U.K., Germany, Russia and China.
3 Trends Shaping the Future of the Internet - Content Industry
Demand for Digital Offerings Growing: The industry is characterized by rapid technological change, frequent product and service introductions, and evolving standards. An expanding range of mobile, digital and cloud-based offerings by industry participants is a major growth driver. Moreover, the proliferation of smart devices and increasing automation of the application development process bodes well.
Industry Prospects are Driven by Ad Spending Rate: Industry participants are focusing on marketing efforts to boost traffic to websites. Advertising and subscriptions are major revenue sources for these companies. Also, the industry is dependent on consumer spending trends, making holiday spending a major deciding factor. However, macroeconomic challenges, lingering effects of the pandemic, raging inflation and higher interest rates are expected to hurt ad spending in the near term.
Increasing Regulations Mar Prospects: Industry participants involved in online search and other social networking activities are increasingly facing regulatory pressure, particularly in China 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. The implementation of the General Data Protection Regulation, which took effect on May 25, 2018, in the EU, adds to the concerns. The California Consumer Privacy Act, which restricts the sale of user data, among other things, is another headwind for the industry participants.
Zacks Industry Rank Indicates Dim Prospects
The Zacks Internet - Content industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #156, which places it in the bottom 38% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates dim near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
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 Outperforms S&P, Lags Sector
The Zacks Internet - Content industry has underperformed the broader Zacks Computer and Technology sector but beat the S&P 500 composite over the past year.
The industry has risen 31.8% over this period compared with the 21.6% growth of the S&P 500 and the 47.6% increase 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 6.48X compared with the S&P 500’s 3.95X and the sector’s 4.52X.
Over the last five years, the industry has traded as high as 6.81X and as low as 5.09X, with the median being 5.97X, as the charts below show.
Trailing 12-Month Price-to-Sales (P/S) Ratio
3 Internet Stocks to Watch
Similarweb: This Israel-based company is benefiting from an expanding clientele. In third-quarter 2023, the global customer base grew 12% year over year to nearly 4,400 customers. The launch of Similarweb 3.0 and the wide availability of SimilarAsk, its digital intelligent AI system, is expected to drive growth.
The Zacks Consensus Estimate for this Zacks Rank #2 (Buy) company’s 2024 loss of 4 cents per share was narrower than the loss of 9 cents over the past 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Similarweb shares have lost 12.1% in the past year.
Price and Consensus: SMWB
Perion Network: This Zacks Rank #3 (Hold) company rides on strong Display Advertising revenues, driven by the rising adoption of its video and Connected TV solutions. Perion benefits from its diversified portfolio. The launch of WAVE, its new advertising solution for dynamic audio ads driven by generative AI, is expected to drive top-line growth.
The Zacks Consensus Estimate for Perion’s 2024 earnings has increased 1.22% to $3.30 per share over the past 60 days.
PERI’s shares have gained 5.2% in the trailing 12-months.
Price and Consensus: PERI
Airbnb: This San Francisco-based company is benefiting from continuous improvements in Nights and Experiences Booked, enabling it to witness a positive trend in its Gross Booking Value. Growing gross nights booked, owing to solid momentum across high-density urban areas and first-time bookers, is a tailwind. Further, increasing guest demand and continuous recovery in cross-border travel are major positives.
The Zacks Consensus Estimate for this Zacks Rank #3 company’s 2024 earnings has decreased by a penny to $4.36 per share over the past 60 days.
Airbnb’s shares have gained 52.5% in the past year.
Price and Consensus: ABNB
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Airbnb, Inc. (ABNB) : Free Stock Analysis Report
Perion Network Ltd (PERI) : Free Stock Analysis Report
Similarweb Ltd. (SMWB) : Free Stock Analysis Report
