The future of the Internet industry looks bright. The industry witnessed a strong growth trajectory supported by technological advancements and evolving consumer demands.
While tech behemoth Alphabet Inc. (GOOGL) has been making significant strides in AI technology, the company reported disappointing financials in the fiscal first quarter. Also, inflationary pressures, higher interest rates, and lingering recessionary fears are expected to impact GOOGL’s outlook this year.
In this article, I have discussed why Yelp Inc. (YELP), trivago N.V. (TRVG), and Travelzoo (TZOO), which have superior POWR Ratings, could be better investments than GOOGL.
Before discussing these stocks, let’s look at GOOGL’s recent performance.
GOOGL has lost 5% over the past month but has gained marginally over the past year, closing its last trading session at $118.34.
During the fiscal first quarter that ended March 31, 2023, GOOGL’s total cost and expenses increased 9.3% year-over-year to $52.37 billion, while its operating income declined 13.3% year-over-year to $17.42 billion.
Moreover, the company’s net income declined 8.4% year-over-year to $15.05 billion, and its EPS decreased 5.1% year-over-year to $1.17. GOOGL has also missed the EPS and revenue estimates in three of the trailing four quarters, which is subpar.
In addition, the stock trades at a premium valuation. In terms of forward EV/Sales, the stock is currently trading at 4.91x, which is 169.6% higher than the industry average of 1.82x. Its forward non-GAAP P/E multiple of 22.81 is 67% higher than the 13.66 industry average.
The integration of digital technology into all business areas is set to fuel a significant surge in internet penetration in the coming years. The industry is benefitting from the growing demand for virtual communication, remote work tools, e-commerce, and streaming services, creating unprecedented opportunities for the rapid expansion of the internet services industry.
Gartner projects global IT spending to reach $4.60 trillion this year, a rise of 5.5% from the previous year.
Adding to this promising outlook is the increasing implementation of 5G technology, which promises faster speeds, improved connectivity, and enables innovative services such as the Internet of Things (IoT). The industry is also bolstered by the expansion of fixed wireless access, further strengthening its prospects.
The global 5G services are expected to expand at a CAGR of 59.4% until 2030.
Let’s take a look at the above-mentioned stocks to see how well-positioned they are to capitalize on the industry’s prospects.
Yelp Inc. (YELP)
YELP operates a platform that connects consumers with local businesses in the United States and internationally. The company’s platform covers various regional business categories. It also offers free and paid advertising products to businesses.
YELP’s trailing-12-month gross profit margin of 91.19% is 83.9% higher than the 49.59% industry average. Its trailing-12-month levered FCF margin of 19.28% is 164.8% higher than the 7.28% industry average.
In terms of forward EV/Sales, YELP is currently trading at 1.66x, which is 9% lower than the industry average of 1.82x. Its forward non-GAAP P/E multiple of 12.93 is 5.4% lower than the 13.66 industry average.
On April 25, 2023, YELP announced a series of new features that make it even easier for consumers to discover businesses that fit their needs and contribute helpful content on Yelp.
YELP’s net revenue increased 12.9% year-over-year to $312.44 million for the fiscal first quarter that ended March 31, 2023. Its adjusted EBITDA rose 12.3% year-over-year to $54.03 million. Its net cash from operating activities increased 23.9% year-over-year to $74.24 million.
YELP’s EPS is estimated to rise 69% year-over-year to $0.62 in the fiscal second quarter (ending June 2023). Its revenue is likely to increase 8.7% year-over-year to $324.97 million in the same quarter. The company surpassed revenue estimates in each of the four trailing quarters, which is impressive.
YELP’s stock has gained 28.4% year-to-date and 33% over the past six months to close its last trading session at $35.09.
YELP’s POWR Ratings reflect a promising outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It also has an A grade for Quality and a B for Value. Within the 58-stock Internet industry, YELP is ranked #2.
Beyond what we have stated above, one can see YELP’s ratings for Growth, Stability, Sentiment, and Momentum here.
trivago N.V. (TRVG)
Headquartered in Düsseldorf, Germany, TRVG operates a hotel and accommodation search platform globally. The company offers an online meta-search for hotels and accommodations through online travel agencies, hotel chains, and independent hotels.
TRVG’s trailing-12-month gross profit margin of 97.64% is 96.9% higher than the 49.59% industry average. Its trailing-12-month EBIT margin of 11.55% is 35.6% higher than the 8.52% industry average.
TRVG’s forward EV/Sales multiple of 0.23 is 87.2% lower than the industry average of 1.82. Its forward non-GAAP P/E of 6.21x is 54.5% lower than the 13.66x industry average.
During the fiscal first quarter that ended March 31, 2023, TRVG’s total revenue increased 9.2% year-over-year to €111.04 million ($121.09 million). Its operating income stood at €14.76 million ($16.10 million) compared to an operating loss of €4.84 million ($5.28 million) in the previous-year quarter.
Moreover, the company reported an EPS of €0.03 compared to a net loss per share of €0.03 in the previous-year quarter.
Street expects TRVG’s revenue to rise 7.6% from the previous-year quarter to $159.10 million in the fiscal second quarter ending June 2023. Furthermore, its EPS for the same quarter is expected to come in at $0.04.
The stock has gained marginally over the past five days, closing its last trading session at $1.19.
TRVG’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which indicates a Strong Buy in our proprietary rating system.
TRVG has an A grade for Quality and a B for Growth, Momentum, and Value. Within the same industry, it is ranked first.
To access the additional POWR Ratings for Stability and Sentiment for TRVG, click here.
Travelzoo (TZOO)
TZOO is a global internet media company that offers travel, entertainment, and lifestyle experiences. The company’s segments include Travelzoo North America; Travelzoo Europe; and Jack’s Flight Club.
TZOO’s trailing-12-month net income margin of 10.78% is 307.3% higher than the 2.65% industry average. Its trailing-12-month gross profit margin of 86.63% is 74.7% higher than the industry average of 49.59%.
TZOO’s forward EV/Sales multiple of 1.59x is 12.6% lower than the industry average of 1.82x. Its forward non-GAAP P/E multiple of 10.38 is 24% lower than the 13.66 industry average.
On May 11, TZOO announced that its members-only service Travelzoo META had opened its doors to one million Founding Members, marking a new era in travel.
This groundbreaking platform offers unique travel experiences in the Metaverse, allowing members to explore and enjoy virtual travel adventures. TZOO META aims to redefine the future of travel by leveraging the possibilities of the Metaverse, providing a novel way for individuals to immerse themselves in travel experiences.
In the fiscal first quarter that ended March 31, 2023, TZOO’s revenues increased 17.1% year-over-year to $21.60 million. The company’s non-GAAP operating income increased 105.4% from the year-ago quarter to $5.54 million.
Also, net income attributable to TZOO increased 55.7% year-over-year to $3.67 million, while its EPS rose 21.1% from the prior-year quarter to $0.23.
Analysts expect TZOO’s EPS and revenue to increase 154.2% and 19.8% from the previous-year quarter to $0.21 and $21.19 million in the fiscal second quarter ending June 2023.
Over the past six months, the stock has gained 100.2% to close the last trading session at $8.68. It has also soared 95.1% year-to-date.
It is no surprise that the stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has an A grade for Sentiment and Quality and a B for Growth and Momentum. Within the same industry, it is ranked #3.
Click here to see the additional ratings for TZOO (Value and Stability).
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
YELP shares were unchanged in premarket trading Tuesday. Year-to-date, YELP has gained 28.35%, versus a 13.67% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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