While Amazon.com, Inc. (AMZN) topped analyst earnings estimates for the second quarter, its cloud unit AWS’ growth rates have dropped substantially over the past three quarters. Economic concerns have pushed enterprises to scrutinize their use of cloud infrastructure, resulting in AWS’ revenue growth slowdown. Also, the stock appears to be trading at an elevated valuation.
Nevertheless, with the growing internet penetration and rapid global digital transformation, the internet sector is well-positioned for robust growth and expansion. Therefore, investors looking to capitalize on the internet industry’s bright growth prospects could consider buying eBay Inc. (EBAY), Expedia Group, Inc. (EXPE), and Yelp Inc. (YELP) instead of AMZN.
E-commerce giant AMZN reported fiscal 2023 second-quarter revenue and earnings that surpassed analyst estimates, though cloud computing growth slowed. The company’s second-quarter net sales were $134.38 billion, compared to the $131.63 billion estimated by analysts. It reported an EPS of $0.65, higher than the $0.35 expected.
Despite topping Wall Street estimates in the second quarter, revenue growth for AMZN’s cloud infrastructure juggernaut AWS continued to be on a constant decline. Enterprises are trimming their expenses amid lingering concerns about high inflation, rising interest rates, and an economic slowdown, and many of them are being cautious about their cloud costs.
AWS’ net sales grew 12.2% year-over-year to $22.14 billion. The nearly 12% growth in the second quarter is slower than the 16% and 20% growth seen during the first quarter of 2023 and the fourth quarter of 2022, respectively. Also, operating income from the cloud unit declined 6.1% year-over-year to $5.37 billion.
AMZN is trading at a significantly elevated valuation compared to its peers. The stock’s forward non-GAAP P/E and EV/Sales of 63.80x and 2.73x are 347.9% and 140.7% higher than the industry averages of 14.24x and 1.13x, respectively. Also, its forward Price/Sales multiple of 2.53 is considerably higher than the industry average of 0.86.
Given its mixed financials and stretched valuation, holding AMZN and waiting for a better entry point in the stock could be wise.
Nevertheless, with the rising internet penetration backed by government initiatives and digitalization gaining solid momentum worldwide, the internet industry’s outlook seems promising. As per Statista, as of 2023, nearly 92% of individuals in the U.S. accessed the internet, up from 77% in 2022.
The COVID-19 pandemic moved much of the world online, leading to significant growth in e-commerce, increased use of digital payments, shift to remote or hybrid work, growing usage of online entertainment platforms, and rising social media engagement. The global e-commerce market is expected to reach $70.90 trillion by 2028, growing at a CAGR of 27.4%.
Further, digital transformation across multiple industries, including retail, education, financial services, telecom and IT, hospitality, and manufacturing, has boosted the demand for wireless broadband services. The global wireless internet services market is expected to grow to $921.87 billion in 2027 at a CAGR of 7%.
The government initiatives to make the internet widely accessible should also propel the internet industry’s growth. For instance, the Broadband Equity, Access, and Deployment (BEAD) Program allocates $42.54 billion from President Biden’s Bipartisan Infrastructure law to expand high-speed internet access by funding planning, infrastructure deployment, and adoption programs.
With these favorable trends in mind, let’s delve into the fundamentals of the three best Internet stocks, beginning with the third choice.
Stock #3: eBay Inc. (EBAY)
EBAY operates marketplace platforms that connect buyers and sellers internationally. The company’s platform includes its online marketplace at ebay.com and the eBay suite of mobile apps enabling users to list, buy, and sell various products.
On September 12, EBAY introduced a new consignment service, providing users direct access to expert sellers who will list and sell their luxury items on their behalf. With launching initially for designer handbags, the service will expand next year to include additional luxury categories such as jewelry and watches.
“Launching a consignment service builds on the momentum of offerings like Authenticity Guarantee and Certified By Brand, giving our customers more trusted ways to buy and sell on the marketplace,” said Tirath Kamdar, Global GM of Luxury at eBay.
On July 11, EBAY acquired Certilogo, an AI-powered apparel and fashion goods digital IDs and authentication provider. The agreement allows the company to offer a ‘Secure by Design’ digital ID technology authentication to their fashion category, expanding opportunities in the circular economy.
With this acquisition, eBay will be able to provide brands with secure, connected product solutions that are both flexible and compatible. It further solidifies eBay as a trusted destination to shop for pre-loved apparel and fashion.
EBAY’s trailing-12-month gross profit margin of 72.37% is 104.2% higher than the industry average of 35.45%. The stock’s trailing-12-month EBIT margin and net income margin of 23.48% and 13.49% are favorably higher than the industry averages of 7.42% and 4.42%, respectively.
For the second quarter that ended June 30, 2023, EBAY’s net revenues increased 4.9% year-over-year to $2.54 billion, while its gross profit grew 3.6% from the year-ago value to $1.82 billion. The company’s non-GAAP net income from continuing operations rose marginally year-over-year to $555 million. Also, its non-GAAP EPS grew 4% from the prior year’s quarter to $1.03.
Furthermore, the company generated $605 million of operating cash flow and $492 million of free cash flow from continuing operations.
Analysts expect EBAY’s revenue for the fiscal year (ending December 31, 2023) to increase 3.6% year-over-year to $10.15 billion. The consensus EPS estimate of $4.19 for the current year indicates a 2% improvement year-over-year. The company has an impressive earnings surprise history as it topped the consensus EPS estimates in each of the trailing four quarters.
Shares of EBAY have gained 3.5% year-to-date and 5.5% over the past year to close the last trading session at $43.62.
EBAY’s POWR Ratings reflect this robust outlook. The stock has an overall B rating, translating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
EBAY has an A grade for Quality and B for Growth. Among the 59 stocks in the Internet industry, it is ranked #13.
To see additional POWR Ratings for Momentum, Value, Stability, and Sentiment for EBAY, click here.
Stock #2: Expedia Group, Inc. (EXPE)
EXPE is a global online travel company operating through Retail; B2B; and trivago segments. The company’s brand portfolio includes Brand Expedia, a full-service online travel brand with localized websites; Hotels.com for marketing and distributing lodging accommodations; Vrbo; Orbitz; Travelocity; CheapTickets; Hotwire; CarRentals.com; and Expedia Cruise.
On July 25, EXPE partnered with Walmart Inc. (WMT) to offer a travel benefit for Walmart+ members, allowing them to earn Walmart Cash on various travel bookings through WalmartPlusTravel.com. This partnership is expected to expand EXPE’s reach while showcasing its technology and extensive travel supply network.
On July 17, EXPE announced a new loyalty program, One Key™, unifying the company’s three flagship travel brands: Expedia®, Hotels.com®, and Vrbo®. The company could benefit from this new loyalty program by simplifying travel rewards for its customers.
EXPE’s trailing-12-month gross profit margin of 86.23% is 143.3% higher than the industry average of 35.45%. Likewise, the stock’s trailing-12-month net income margin of 7.33% is 66.1% higher than the industry average of 4.42%.
For the second quarter ended on June 30, 2023, EXPE’s revenue increased 5.6% year-over-year to $3.36 billion. Its operating income grew 28.4% from the year-ago value to $443 million. The company’s adjusted EBITDA stood at $747 million, up 15.3% from the prior year’s quarter.
In addition, the company’s adjusted net income and adjusted earnings per share came in at $428 million and $2.89, increases of 38.1% and 47.4% year-over-year, respectively.
Street expects EXPE’s revenue to increase 9.9% year-over-year to $12.83 billion for the fiscal year ending December 2023. The company’s EPS is estimated to grow 40.1% from the previous year to $9.51.
EXPE’s stock has gained 10.6% over the past six months and 19.3% year-to-date to close the last trading session at $104.58.
EXPE’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system.
EXPE has an A grade for Value and Quality. The stock is ranked #6 among 59 stocks in the Internet industry.
Click here to view EXPE’s ratings for Momentum, Growth, Stability, and Sentiment.
Stock #1: Yelp Inc. (YELP)
YELP operates a platform that connects consumers with local businesses internationally. The company’s platform covers local business categories, including restaurants, shopping, beauty and fitness, health, and other categories, and home, local, auto, professional, pets, events, real estate, and financial services.
YELP’s trailing-12-month gross profit margin of 91.20% is 84.7% higher than the industry average of 49.37%. And the stock’s trailing-12-month ROTA of 4.14% is significantly higher than the industry average of 1.55%. Also, its trailing-12-month levered FCF margin of 22.66% compares to the industry average of 8.50%.
YELP’s net revenue increased 12.8% year-over-year to $337.13 million for the second quarter that ended June 30, 2023. Its income from operations was $18.74 million, up 17.1% year-over-year. Its adjusted EBITDA rose 24.7% year-over-year to $83.94 million. The company’s net income and EPS grew 83.9% and 90.9% year-over-year to $14.73 million and $0.21, respectively.
Analysts expect YELP’s revenue to increase 11.4% year-over-year to $1.33 billion for the fiscal year ending December 2023. The company’s EPS for the ongoing year is expected to grow 137.7% year-over-year to $2.89. Also, the company surpassed the consensus revenue estimates in each of the four trailing quarters.
The stock has gained 44.8% over the past six months and 24.3% over the past year to close the last trading session at $42.98.
YELP’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
The stock has an A grade for Growth and Quality and a B for Value. It is ranked first in the same industry.
In addition to the POWR Ratings stated above, one can access YELP’s Momentum, Sentiment, and Stability ratings here.
What To Do Next?
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AMZN shares rose $0.47 (+0.34%) in premarket trading Wednesday. Year-to-date, AMZN has gained 63.85%, versus a 17.05% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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