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4 Internet Services Stocks to Buy Today

Sejuti Banerjea

The Internet Services industry tends to be seasonal, with revenues rising sharply in the fourth quarter followed by a gentler dip in the first quarter. This apart, revenues have grown steadily in the last three years as have gross margins.

The fixed element in opex is significant, as a result of which it doesn’t grow as much as revenue in an up quarter or decline as much in periods of weakness. As a result the net income before non-recurring items also maintains a steady upward trend. Debt levels rose at the end of 2016. Both operating and balance sheet cash continue to grow.

Year to date, the Industry has outperformed the S&P 500:

The industry is in the top 35% of the Zacks-ranked industries, meaning that the stocks included here currently have a better-than-average chance of outperforming the market. However, most of the companies are in the growth phase. As a result, the following picks will be attractive for growth-oriented investors:

Autohome Inc. ATHM

Autohome offers an online destination for automobile consumers primarily in the People's Republic of China. It operates the autohome.com.cn (for new cars) and che168.com (for used cars) websites through which advertising services, dealer subscription services, used automobile listings services and automobile dealer subscription services are delivered. It also offers automotive aftermarket services and real-time feedback on service providers.

In the last quarter, the company’s core media and leads generation businesses generated very solid year-on-year revenue growth of 33% and 40%, respectively. Management said that the average daily unique visitors grew 27% from the year-ago quarter with mobile advertising revenue growing 113%. The company’s success stems from significant technological improvements to its platform (AR showrooms are on the way for example so dealers can showcase their products better and generate higher sales).

Autohome carries a Zacks Rank #2 (Buy).

Earnings surprise in the last quarter was 41.4%; the company is expected to grow earnings 21.3% in 2017 and 28.6% in 2018.

Limelight Networks LLNW

Limelight networks offers a content delivery network (scalable platform for its 1,300 odd media partners that offer their Internet, entertainment, software and technology content to their global customers through it) thus helping them monetize their digital assets. LimeLight's architecture bypasses the busy public Internet using a dedicated optical network that interconnects thousands of servers and delivers massive files at the speed of light -- directly to the access networks that consumers use every day.

Management said that in the last quarter, the top 20 customers grew 28% with Amazon AMZN, Apple AAPL, Microsoft MSFT and Google growing even faster. Amazon was a 10% customer in the quarter. Management also mentioned that the company was building capacity in India, a market with tremendous potential. In the last quarter, Limelight signed on MultiTV, one of India’s fastest-growing OTT solution providers with over 40 million viewers across India.

The company appears to have turned the corner, generating stronger revenue and gross profit even as opex remains steady. This has helped it strengthen earnings before non-recurring items over the last 6 quarters, which in turn enabled it to generate net positive cash flow in the last twelve months.

One thing to keep in mind regarding this stock is litigation, because there are a number of patent infringement lawsuits between Akamai and Limelight -- not all of which will go in its favor. The company is already making payments on the settlement of one such case.

Limelight Networks carries a Zacks Rank #2.

Earnings surprise in the last quarter was 66.7%. The company has topped estimates in three of the last four quarters at an average rate of 29.2%; earnings are expected to grow 58.3% in 2017 and 80.0% in 2018.

Marchex Inc. MCHX

Marchex offers advertisers a platform to drive, measure and monetize mobile and online telephonic connections. Its relationships with leading mobile carriers and mobile app developers such as AT&T, Verizon and Sprint are integrated into its Digital Call Marketplace that measures and optimizes ad campaign results. Other tools include the Marchex Call Analytics that enables ad campaign measurement and Local Leads that facilitates customer acquisition.

Marchex didn’t have a strong 2016, with a number of customers getting acquired and their business moving to competitors. This has resulted in a bit of a strain on the business. Management expects to take out $10 million in annualized costs, which will realign the cost structure with its current revenue outlook and help the company to be at or near breakeven for adjusted EBITDA in the current quarter.

But that’s not all there is to it. Late last year, the company expanded its agreement with Yellow Pages up to 2018 (which had a cost impact in the last quarter, but will be positive going forward). In February, it signed an agreement with Facebook FB that will integrate across their social analytics solution and into the Marchex Omnichannel Analytics Cloud to help Facebook deliver advanced call analytics to marketers.

Marchex carries a Zacks Rank #2.

Earnings surprise in the last quarter was 25.0%; earnings are expected to grow 40.6% in 2017 and 26.3% in 2018.

TrueCar Inc. TRUE

TrueCar offers an online automotive information and communications platform on its TrueCar.com website. This enables users to obtain market-based pricing data on new and used cars, as well as to connect with its network of TrueCar certified dealers.

TrueCar carries a Zacks Rank #2.

Earnings surprise in the last quarter was 20.0%; the company has topped estimates in each of the last four quarters at an average rate of 31.5%; earnings are expected to grow 20.2% in 2017 and 79.1% in 2018.

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Amazon.com, Inc. (AMZN): Free Stock Analysis Report
Limelight Networks, Inc. (LLNW): Free Stock Analysis Report
Facebook, Inc. (FB): Free Stock Analysis Report
TrueCar, Inc. (TRUE): Free Stock Analysis Report
Autohome Inc. (ATHM): Free Stock Analysis Report
Marchex, Inc. (MCHX): Free Stock Analysis Report
Apple Inc. (AAPL): Free Stock Analysis Report
Microsoft Corporation (MSFT): Free Stock Analysis Report
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