Despite economic uncertainties, the internet sector is thriving, thanks to global digital adoption, accelerated digitalization, and smart infrastructure growth. Internet companies are expanding their services to meet the rising demand for digital solutions by people and businesses.
Amid this backdrop, it could be wise to buy fundamentally strong internet stocks: Netflix, Inc. (NFLX), and Alphabet Inc. (GOOGL).
Before diving deeper into the fundamentals of these stocks, let’s discuss why the internet industry is well-positioned for growth.
The pandemic sped up digital adoption, increasing internet usage and creating growth in services like social media, e-commerce, online learning, and remote work tools. This has opened opportunities for internet service providers globally.
In 2023, there were 5.18 billion global internet users, about two-thirds of the world's population. The United States, a major online market, has over 90% internet access among Americans and is home to leading internet companies.
Furthermore, government initiatives like the Broadband Equity, Access, and Development Program, funded with $42.45 billion from President Biden's Bipartisan Infrastructure law, aim to make the Internet accessible to all by supporting high-speed Internet planning, infrastructure deployment, and adoption programs nationwide.
On top of it, internet access in the United States is expected to rise by 3.9% between 2024 and 2028, reaching a new peak of 97.6% in 2028.
Considering these conducive trends, let’s look at the fundamentals of the two above-mentioned Internet stocks, starting with the second one.
Stock #2: Netflix, Inc. (NFLX)
NFLX provides entertainment services. It offers TV series, documentaries, feature films, and mobile games across various genres and languages. The company provides members the ability to receive streaming content through a host of internet-connected devices, including TVs, digital video players, television set-top boxes, and mobile devices.
In terms of the trailing-12-month EBIT margin, NFLX’s 18.35% is 120.5% higher than the 8.32% industry average. Its 55.05% trailing-12-month levered FCF margin is 622.2% higher than the 7.62% industry average. Moreover, the stock’s 21.23% trailing-12-month ROCE is 564.3% lower than the 3.20% industry average.
For the third quarter that ended September 30, 2023, NFLX’s revenue increased 7.8% year-over-year to $8.54 billion. Its operating income rose 25% over the prior year quarter to $1.92 billion. In addition, the company’s net income and EPS increased 20% and 20.3% year-over-year to $1.68 billion and $3.73, respectively.
For the quarter ending December 31, 2023, NFLX’s EPS is expected to increase significantly year-over-year to $2.23. For the same quarter, its revenue is expected to increase 10.7% year-over-year to $8.69 billion. It surpassed the consensus EPS estimate in three of the trailing four quarters. The stock has gained 34.9% year-to-date to close the last trading session at $397.87.
NFLX’s POWR Ratings reflect a positive outlook. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Growth, Sentiment, and Quality. It is ranked #8 out of 57 stocks in the Internet industry. To see NFLX’s Value, Momentum, and Stability ratings, click here.
Stock #1: Alphabet Inc. (GOOGL)
META engages in the development of products that enable people to connect and share with friends and family through mobile devices, personal computers, virtual reality headsets, and wearables worldwide. It operates in two segments: Family of Apps and Reality Labs.
In terms of the trailing-12-month net income margin, GOOGL’s 22.46% is 535.2% higher than the 3.54% industry average. Its 25.33% trailing-12-month ROCE is 692.7% higher than the 3.20% industry average. Likewise, the stock’s 16.82% trailing-12-month ROTA is 991.5% higher than the 1.54% industry average.
GOOGL’s revenues for the third quarter that ended September 30, 2023, increased 11% year-over-year to $76.69 billion. The company’s operating income rose 24.6% year-over-year to $21.34 billion.
For the same quarter, its net income and EPS rose 41.5% and 46.2% over the prior-year quarter to $19.69 billion and $1.55, respectively. Also, its cash and cash equivalents came in at $30.70 billion, increasing 40.3% compared to $21.88 billion as of December 31, 2022.
GOOGL’s EPS and revenue for the quarter ended December 31, 2023, are expected to increase 52.7% and 11.9% year-over-year to $1.60 and $85.12 billion, respectively. It surpassed the consensus EPS estimate in three of the trailing four quarters. The stock has gained 38.5% year-to-date to close the last trading session at $122.17.
GOOGL’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #4 in the Internet industry. It has a B grade for Sentiment and Quality. Click here to see GOOGL’s Growth, Value, Momentum, and Stability ratings.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
GOOGL shares were trading at $124.28 per share on Monday afternoon, up $2.11 (+1.73%). Year-to-date, GOOGL has gained 40.86%, versus a 9.28% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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