2 Internet Stocks to Buy in a Prospering Industry

The Zacks Internet – Content industry is benefiting from the reopening of harvest, resulting in higher ad spending. The pandemic has opened up new channels of growth for Internet content providers. The industry participants have witnessed solid demand for e-commerce services from home-confined consumers amid lockdowns and restrictions on travel. Moreover, the resurgence in digital advertising spending is a key catalyst. Industry participants like Airbnb ABNB and Perion Networks PERI are benefiting from solid demand for digital offerings as well as the increasing importance of video content and cloud-based applications. These companies are also expanding their presence across social media, display and connected TV and search, thereby driving top-line growth.

Industry Description

The Zacks Internet – Content industry comprises providers of video encoding platform, personal services, Internet content & information, staffing & outsourcing services, publishing, capital markets, media-based, home service, digital insights and measurement, stock photo, video and music licensing as well as online travel companies. The industry is witnessing a rapid change in consumer behavior and ongoing digitalization. Advertising is a major source of revenues for industry participants, so these companies are trying to expand their digital presence to win new customers. They are also expanding their presence across social media, display and connected TV and search. Apart from the United States, a number of companies in this industry are located in Israel, the United Kingdom, Germany, Russia and China.

3 Trends Shaping the Future of the Internet – Content Industry

Growing Demand for Digital Offerings: The industry is characterized by rapid technological change, frequent product and service introductions, and evolving standards. An expanding range of mobile, digital and cloud-based offerings by industry participants is a major growth driver. Moreover, the proliferation of smart devices and increasing automation of the application development process bodes well.

Recovery in Ad Spending Bodes Well: Industry participants are focusing on marketing efforts to boost traffic to websites. Advertising and subscriptions are major sources of revenues for these companies. Also, the industry is dependent on consumer spending trends, making holiday spending a major deciding factor. The reopening of transport is driving recovery in ad spending, which bodes well for industry participants.

Increasing Regulations Mar Prospects: Industry, involved in online search and other social-networking activities, are facing regulatory pressure, particularly in China, Russia and the European Union (EU). The China government has a number of regulations related to direct advertising, which is a prime revenue source for these companies. The implementation of General Data Protection Regulation, which took effect on May 25, 2018, in the EU, adds to the concerns. Moreover, the California Consumer Privacy Act (CCPA), which restricts sales of user data, among other things, is a headwind for the industry participants.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Internet – Content industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #64, which places it at the top 25% 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 bullish 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.

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 Shareholder Returns

The Zacks Internet – Content industry has underperformed the broader Zacks Computer and Technology sector as well as the Zacks S&P 500 composite over the past year.

The industry has declined 37% over this period versus the 6.6% decrease of the S&P 500 and the 19.9% ​​decline of the broader sector.

One-Year Price Performance

Industry’s Current Valuation

On the basis of the trailing 12-month price-to-sales ratio (P/S), which is a commonly used multiple for valuing Internet – Content stocks, we see that the industry is currently trading at 4.44X compared with the S&P 500’s 4.02X and the sector’s trailing 12-month P/S of 4.07X.

Over the last five years, the industry has traded as high as 15.58X, as low as 3.77X and at the median of 8.54X, as the chart below shows.

Trailing 12-Month Price-to-Sales (P/S) Ratio

2 Internet Stocks to Buy

Perion Network: This Israel-based global technology company delivers online advertising solutions and search monetization to brands and publishers in North America, Europe and internationally. Perion is committed to providing digital advertising solutions to capture consumer attention and drive engagement as well as deliver ads across a portfolio of websites and mobile applications.

Perion is riding on strong advertising revenue growth. Perion is expected to benefit from the robust performance of its search business, driven by strong advertiser demand.

The Zacks Consensus Estimate for this Zacks Rank #1 (Strong Buy) company’s 2022 earnings increased 6.25% to $1.87 per share over the past 30 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Perion’s shares have declined 9.1% year to date.

Price and Consensus: PERI

Airbnb: This San Francisco, CA-based online travel company is riding on a recovery in long-distance and cross-border travel. Growth in Average Daily Rates remains a positive. Growing active listings in Latin America, North America and EMEA are also contributing well.

Airbnb, which currently has a Zacks Rank #2 (Buy), is expected to see an improvement in bookings and traffic trends.

The Zacks Consensus Estimate for Airbnb’s 2022 earnings has moved up 16.4% to $2.20 per share over the past 30 days.

Airbnb’s shares are down 28.7% year to date.

Price and Consensus: ABNB

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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