2 internet stocks to buy in a tough industry

2 internet stocks to buy in a tough industry

The Zacks Internet – Content industry is suffering from the pandemic-induced trend reversal, as well as challenging macro-economic conditions globally. Persistent inflation and higher interest rates are having a detrimental effect on advertising spending, the main source of income for industry players. The ongoing war between Russia and Ukraine has been an overhang on the outlook for industry players in Europe. Nevertheless, industry players like Airbnb (ABNB free report) and Perion networks (PERI Free Report) are benefiting from strong demand for digital offerings, as well as the growing 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 revenue growth.

Description of the industry

The Zacks Internet – Content industry includes providers of video encoding platforms, personal services, Internet content and information, staffing and outsourcing services, publishing, capital markets, media, home services, digital information and measurement, photo, video and music licensing, and online travel agencies. The industry is witnessing a rapid change in consumer behavior and ongoing digitalization. Advertising is a major source of income for players in the industry, which is why these companies are trying to expand their digital presence to gain customers. They are also expanding their presence on social media, display and connected TV, and search. Besides the United States, a number of companies in this industry are located in Israel, the United Kingdom, Germany, Russia, and China.

3 Trends Shaping the Future of the Internet – Content Industry

Demand for digital offerings is growing: The industry is characterized by rapid technological change, frequent product and service launches and ever-changing standards. A growing range of mobile, digital and cloud-based offerings by industry players is a major growth driver. Additionally, the proliferation of smart devices and increasing automation of the app development process bodes well.

The outlook for the industry is determined by the rate of advertising spend: Industry participants focus on marketing efforts to increase traffic to websites. Advertising and subscriptions are the main sources of income for these companies. Additionally, the industry depends on consumer spending trends, which makes holiday spending a major deciding factor. The reopening of economies is driving the recovery in advertising spending, which bodes well for industry players in the long run. However, macroeconomic challenges, the lingering effects of the pandemic, runaway inflation and rising interest rates are expected to hurt advertising spending in the near term.

Increased Regulation Mars Outlook: Industry players, involved in online search and other social networking activities, are increasingly facing regulatory pressures, particularly in China and the European Union (EU). The Chinese government has a number of regulations relating to direct advertising, which is a key source of revenue for these companies. The implementation of the General Data Protection Regulation, which entered into force on May 25, 2018 in the EU, adds to concerns. Another headwind for industry players is the California Consumer Privacy Act (CCPA), which restricts the sale of user data, among other things.

Zacks’ industry rankings point to weak prospects

The Zacks Internet – Content industry is housed within the broader Zacks IT and Technology sector. It carries a Zacks industry ranking of #131, which puts it at the bottom 48% of over 250 Zacks industries.

The group’s Zacks Industry Rank, which is essentially the average of the Zacks Rank of all member stocks, indicates a weak near-term outlook. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.

Before outlining a few stocks you might consider for your portfolio, let’s take a look at recent stock market performance and the industry valuation picture.

The industry lags behind shareholder returns

The Zacks Internet – Content industry has underperformed the broader Zacks IT and Technology sector, as well as the Zacks S&P 500 composite, over the past year.

The industry fell 47.8% during this period compared to the 17.4% drop in the S&P 500 and the 34.5% drop in the broader sector.

Year-over-year price performance

Current industry assessment

Based on the trailing 12-month price-to-sales (P/S) ratio, which is a multiple commonly used to value Internet – Content stocks, we see that the sector is currently trading at 4.44X against the S&P 500. 4.02X and the sector’s 12-month P/S of 4.07X.

Over the past five years, the industry has traded as low as 15.58X, as low as 3.77X and at the median of 8.54X, as seen in the chart below.

Rolling 12-month price-to-sales (P/S) ratio

2 Internet stocks to buy

Perion: The Israel-based global technology company provides online advertising and search monetization solutions to brands and publishers in North America, Europe and internationally. Perion is committed to providing digital advertising solutions to capture consumer attention and drive engagement, as well as delivering advertisements across a portfolio of websites and mobile applications.

Perion is banking on strong growth in advertising revenue. PERI should benefit from the solid performance of its Search business, driven by strong demand from advertisers.

The Zacks consensus estimate for this Zacks #1 ranked company (Strong Buy) in 2022 has risen 6% to $2.12 per share over the past 30 days. You can see the full list of today’s Zacks #1 Rank stocks here.

Perion shares are up 8.1% year-to-date.

Pricing and Consensus: PERI

Airbnb: This San Francisco, Calif.-based online travel agency is enjoying a recovery in long-distance and cross-border travel. Growth in average daily rates remains positive. Active listing growth in Latin America, North America and EMEA is also contributing.

Airbnb, which currently has a Zacks No. 2 ranking (purchase), should see improvements in bookings and traffic trends.

Zacks’ consensus estimate for Airbnb’s 2022 earnings rose 18.3% to $2.58 per share in the past 30 days.

Airbnb shares are down 35.7% year-to-date.

Pricing and Consensus: ABNB

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