Whether it be online shopping or social media, secular forces are propelling consumer internet businesses forward. But it’s not all sunshine and rainbows as consumer purchasing power can make or break demand. This unpredictability is weighing on returns as the industry has posted a flat return over the past six months while the S&P 500 was up 3.3%.
Investors should tread carefully as only a handful of companies in this space are positioned for long-term success due to the intense competition. With that said, here are three internet stocks best left ignored.
The RealReal (REAL)
Market Cap: $592.6 million
Founded by consignment store aficionado Julie Wainwright, The RealReal (NASDAQ: REAL) is an online marketplace for buying and selling secondhand luxury goods.
Why Are We Cautious About REAL?
- Preference for prioritizing user growth over monetization has led to 5.5% annual drops in its average revenue per user
- Cash burn makes us question whether it can achieve sustainable long-term growth
- Depletion of cash reserves could lead to a fundraising event that triggers shareholder dilution
The RealReal’s stock price of $5.32 implies a valuation ratio of 21x forward EV/EBITDA. Read our free research report to see why you should think twice about including REAL in your portfolio.
Take-Two (TTWO)
Market Cap: $40.69 billion
Best known for its Grand Theft Auto and NBA 2K franchises, Take Two (NASDAQ: TTWO) is one of the world’s largest video game publishers.
Why Do We Think Twice About TTWO?
- Efficiency fell over the last few years as its EBITDA margin declined by 8.3 percentage points because it pursued growth instead of profits
- Incremental sales over the last three years were much less profitable as its earnings per share fell by 108% annually while its revenue grew
- Long-term business health is up for debate as its cash burn has increased over the last few years
Take-Two is trading at $222.36 per share, or 18.6x forward EV/EBITDA. Check out our free in-depth research report to learn more about why TTWO doesn’t pass our bar.
Expedia (EXPE)
Market Cap: $22.64 billion
Originally founded as a part of Microsoft, Expedia (NASDAQ: EXPE) is one of the world’s leading online travel agencies.
Why Are We Hesitant About EXPE?
- Customer spending has dipped by 1.8% on average as it focused on growing its bookings
- Highly competitive market means it’s on the never-ending treadmill of sales and marketing spend
- Free cash flow margin dropped by 23.4 percentage points over the last few years, implying the company became more capital intensive as competition picked up
At $178.10 per share, Expedia trades at 7.2x forward EV/EBITDA. If you’re considering EXPE for your portfolio, see our FREE research report to learn more.
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