Internet Services Industry Outlook: Price Correction Creating Opportunities

Internet Services companies are primarily those that rely on huge software and hardware infrastructure, referred to as their properties, to deliver various services to consumers. Therefore, consumers can avail the services by accessing these properties with their personal connected devices from almost anywhere in the world.

Companies in the sector generally operate two models: an ad based model where the service is offered free and an ad free model where they charge for the service.

Here are the three major themes in the industry-

• Traffic acquisition is one of the most important drivers of revenue, so companies invest in advertising or building communities that can draw more users to their online properties and get them to spend more time there, much like a store owner would try to keep a prospective buyer. Some large players, including those providing infrastructure services, grow by tying up with other such large players for access to their customers. Since the personal touch is absent in an online store, many rely on cookies and other technologies to track users, collect data on them and profile them in order to better understand their needs.
• As these companies have grown over time, some of them have collected such a wealth of information on their users that the data itself is now helping them build artificial intelligence (AI) to lower cost and generate new technologies and services. As a result, ad-based services are no longer considered free in some parts of the world and the EU in particular has framed a complex law in GDPR that requires service providers to acquire explicit permission from users before collecting their data.
• The installed base of connected devices continues to grow beyond PCs and smartphones to IoT, automotive and more, creating additional opportunities. The ownership of multiple devices automatically drives people to use these services more as they increasingly automate routine chores.

While not all businesses are built on the same scale or have the same customer reach, the scope for growth is huge. For companies that are already pursuing research in AI, the prospects are even brighter.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Internet - Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #89, which places it among the top 35% 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 bright 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.

The industry’s positioning in the top 35% of the Zacks-ranked industries is a result of stabilization in the earnings outlook for the constituent companies in aggregate after declines right through 2018.

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 Stock Market Performance

The Zacks Internet – Services Industry has lagged the broader Zacks Computer and Technology Sector as well as the S&P 500 index over the past year.

The industry has declined 15.7% over this period compared to the S&P 500 index’s 3.5% gain and broader sector’s 2.0% gain.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is a commonly used multiple for valuing technology companies, we see that the industry is currently trading at 31.2X compared to the S&P 500’s 16.5X. It is also above the sector’s forward-12-month P/E of 19.1X.

Forward 12 Month Price-to-Earnings (P/E) Ratio

Bottom Line

Despite the recent correction, the industry still appears overvalued. However, since its growth prospects remain bright and estimates have started to stabilize, there could be better days ahead.

A number of companies present solid growth opportunity here and a few with Zacks #1 Rank (Strong Buy) and #2 Rank (Buy) are highlighted below. You can see the complete list of today’s Zacks #1 Rank stocks here.

ANGI Homeservices Inc. (ANGI): This digital marketplace for home services has gained 26.6% in the past year. The current fiscal Zacks Consensus EPS Estimate for this Zacks Rank #1 company has remained stable over the last 30 days.

Price and Consensus: ANGI

Yatra Online, Inc. (YTRA): This online travel agency has lost 39.6% in the past year. The current fiscal Zacks Consensus EPS Estimate for this Zacks Rank #1 company has improved a penny in the last 7 days.

Price and Consensus: YTRA

Alphabet (NASDAQ:GOOGL) Inc. (GOOGL): This web-based search and other services company has gained 9.0% in the past year. The current fiscal Zacks Consensus EPS Estimate for this Zacks Rank #2 company has improved 37 cents in the last 7 days.

Price and Consensus: GOOGL

Facebook (NASDAQ:FB), Inc. (FB): This social networking company has lost 4.1% in the past year. The current fiscal Zacks Consensus EPS Estimate for this Zacks Rank #2 company has improved 5 cents in the last 30 days.

Price and Consensus: FB