2 Internet Stocks to Buy From a Challenging Industry – November 16, 2022

The Zacks Internet – Content industry is suffering from the reversal of the pandemic-led trends, along with challenging macro-economic 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 has been an overhang on the prospects of the industry participants in Europe. Nevertheless, industry participants like Airbnb (ABNB Free Report) and Perion Networks (PERI Free Report) 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 including providers of video encoding platforms, personal services, Internet content & information, staffing & 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, so 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 UK, 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. The reopening of economies is driving the recovery in ad spending, which bodes well for the industry participants in the long haul. However, macro-economic 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 General Data Protection Regulation, which took effect on May 25, 2018, in the EU, adds to the concerns. The California Consumer Privacy Act (CCPA), which restricts the sale of user data, among other things, is another headwind for industry participants.

Zacks Industry Rank Indicates Sun Prospects

The Zacks Internet – Content industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #131, which places it at the bottom 48% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically 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 outperforms the bottom 50% by a factor of more than 2 to 1.

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 Shareholder Returns

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

The industry has declined 47.8% over this period versus the 17.4% dip of the S&P 500 and the 34.5% slip 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 4.44X compared with the S&P 500’s 4.02X and the sector’s trailing 12-month P/S of 4.07X.

Over the last five years, the industry has traded as high as 15.58X, as low as 3.77X and at the median of 8.54X, as the chart below shows.

Trailing 12-Month Price-to-Sales (P/S) Ratio

2 Internet Stocks to Buy

Perion: The Israel-based global technology company delivers online advertising solutions, and search monetization 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 deliver ads across a portfolio of websites and mobile applications.

Perion is riding on strong advertising revenue growth. PERI is expected to benefit from the robust performance of its Search business, driven by strong advertiser demand.

The Zacks Consensus Estimate for this Zacks Rank #1 (Strong Buy) company’s 2022 earnings increased 6% to $2.12 per share over the past 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Perion’s shares are up 8.1% year to date.

Price and Consensus: PERI

Airbnb: This San Francisco, CA-based online travel company is riding on a recovery in long-distance and cross-border travel. Growth in Average Daily Rates remains a positive. Growing active listings in Latin America, North America and EMEA are also contributing well.

Airbnb, which currently has a Zacks Rank #2 (Buy), is expected to see improvements in bookings and traffic trends.

The Zacks Consensus Estimate for Airbnb’s 2022 earnings has moved up 18.3% to $2.58 per share over the past 30 days.

Airbnb’s shares are down 35.7% year to date.

Price and Consensus: ABNB

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