Whether it be online shopping or social media, secular forces are propelling consumer internet businesses forward. Luckily for them, the market seems to believe there is a long runway for growth as the industry has recorded a 29.6% gain over the past six months, beating the S&P 500 by 13.7 percentage points.
Nevertheless, investors should tread carefully as many internet companies pursue winner-take-all strategies, meaning losses can be hefty if their playbooks don’t pan out. On that note, here are three internet stocks we’re steering clear of.
eBay (EBAY)
Market Cap: $41.5 billion
Originally known as the first online auction site, eBay (NASDAQ: EBAY) is one of the world’s largest online marketplaces.
Why Does EBAY Give Us Pause?
- Increasing competition is redirecting attention to other platforms as it failed to grow its active buyers over the last two years
- Underwhelming performance in both user spending and platform engagement suggests its platform is becoming less effective
- Costs have risen faster than its revenue over the last few years, causing its EBITDA margin to decline by 4.3 percentage points
At $90.80 per share, eBay trades at 12.7x forward EV/EBITDA. Check out our free in-depth research report to learn more about why EBAY doesn’t pass our bar.
Electronic Arts (EA)
Market Cap: $43.13 billion
Best known for its Madden NFL and FIFA sports franchises, Electronic Arts (NASDAQ: EA) is one of the world’s largest video game publishers.
Why Do We Think Twice About EA?
- Lackluster 1.2% annual revenue growth over the last three years indicates the company is losing ground to competitors
- Anticipated sales growth of 2.2% for the next year implies demand will be shaky
- Day-to-day expenses have swelled relative to revenue over the last few years as its EBITDA margin fell by 6.1 percentage points
Electronic Arts is trading at $172 per share, or 14.4x forward EV/EBITDA. To fully understand why you should be careful with EA, check out our full research report (it’s free).
Nextdoor (KIND)
Market Cap: $805.5 million
Helping residents figure out what's happening on their block in real time, Nextdoor (NYSE: KIND) is a social network that connects neighbors with each other and with local businesses.
Why Are We Wary of KIND?
- Modest 6.5% annual growth in weekly active users over the last two years indicates potential challenges in customer acquisition and retention
- Poor expense management has led to EBITDA margin losses
- Cash burn makes us question whether it can achieve sustainable long-term growth
Nextdoor’s stock price of $1.89 implies a valuation ratio of 3.2x forward price-to-gross profit. Read our free research report to see why you should think twice about including KIND in your portfolio.
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