Thanks to increased internet penetration worldwide, the internet industry is well-poised for robust growth and expansion. Considerable growth in internet usage would create several growth opportunities for internet service providers, who capitalize on the surge in online activities such as remote/hybrid work, e-commerce, online payments, and more.
Given the industry’s robust outlook, it could be wise to invest in fundamentally sound internet stocks LY Corporation (YAHOY), Expedia Group, Inc. (EXPE), and Data Storage Corporation (DTST), which are outperforming Amazon.com, Inc. (AMZN) and Netflix, Inc. (NFLX).
AMZN’s Amazon Web Services, Inc. (AWS) recently introduced five generative AI innovations, assisting organizations of all sizes to build new generative AI applications, improve employee productivity, and transform their business. Further, to seek a bigger footprint in AI development, AMZN announced an investment of up to $4 billion in the AI start-up Anthropic.
Also, AMZN’s AWS’s revenue growth continues to be constantly declining. Companies are cutting their cloud costs amid concerns about persistent inflation, higher interest rates, and enhanced economic uncertainty. Over the last three quarters, AWS growth rates dropped substantially, from nearly 20% to 16% to 12% in the second quarter of 2023.
Adding up to its challenges, AMZN faces an anti-trust lawsuit from the Federal Trade Commission (FTC) and 17 U.S., accusing the retailer of suffocating rivals and increasing costs for both sellers and shoppers.
Given AMZN’s elevated valuation and near-term uncertain outlook, it could be wise to wait for a better entry point for the stock. Another stock that investors should hold for now is NFLX.
With NFLX’s multiple revenue initiatives like the crackdown on password sharing and ad-supported offering likely to take time to mature, Chief Financial Officer Spencer Neumann recently said that the company anticipates full-year operating margins, which peaked at 21%, to be just in the range of 18% to 20%.
After the CFO’s warning of softer margins and comments like ad tier is not material yet, NFLX’s stock has been on a downtrend. The stock has declined 18.2% over the past month to close the last trading session at $365.93.
On the other hand, the outlook of the internet industry appears optimistic, driven by increased internet penetration, favorable government initiatives, and rising adoption of various online services amid growing digitalization globally.
According to Statista, approximately 92% of individuals in the U.S. accessed the internet as of 2023, an increase from 77% in 2022. Moreover, the United States is one of the biggest online markets globally, and last year, there were around 299 million internet users in the country.
The COVID-19 pandemic led to a significant surge in internet usage and internet-based services, including social media, online learning, e-commerce, digital payments, communications, and remote work tools, creating growth opportunities for companies providing internet services.
Supportive government initiatives to make the internet widely accessible drive the industry’s prospects. The Broadband Equity, Access, and Deployment (BEAD) Program allocates $42.45 billion from President Biden’s Bipartisan Infrastructure Law to expand high-speed internet access by funding planning, infrastructure deployment, and adoption plans.
With these favorable trends in mind, let’s take a look at the fundamentals of the three Internet stocks, starting with number 3.
Stock #3: Data Storage Corporation (DTST)
DTST provides data protection and disaster recovery solutions; Infrastructure as a Service, support and maintenance, and internet solutions; cybersecurity solutions; and voice and data solutions. The company offers a wide range of solutions to businesses in healthcare, banking and finance, construction, manufacturing, education, and government sectors.
On July 27, DTST secured a multi-year subscription-based contract with one of the largest food distributors in the United States. The company will provide disaster-recovery solutions for the client to lower the recovery time of critical data and enable them to resume normal business operations quickly.
“Specifically, with this contract, we have gained a large footprint in this vertical, enhancing our reach within the food industry and providing new growth opportunities. We are proud to be supporting this premier client and look forward to exploring additional solutions for implementation in the future,” said DTST’s CEO, Chuck Piluso.
On July 6, DTST announced a large, subscription-based cloud services contract with a leading promotional products company through its Flagship Solution Group subsidiary.
Through cloud-based disaster recovery and infrastructure solutions, the company will provide data protection and business continuity services to help the client secure their data while minimizing downtime and recovering data with their recovery objectives. This deal validates DTST’s ability to meet the clients’ requirements and deliver innovative technologies.
In terms of forward EV/EBITDA, DTST is currently trading at 8.34x, 40.3% lower than the industry average of 13.99x. Likewise, the stock’s forward Price/Sales of 1.03x is 59.7% lower than the industry average of 2.56x.
Over the past three years, DTST’s revenue has grown at a CAGR of 39.4%. The company’s total assets and levered free cash flow have increased at CAGRs of 42.7% and 7.8% over the same timeframe, respectively.
For the second quarter that ended on June 30, 2023, DTST’s sales increased 22.3% year-over-year to $5.90 million, while its gross profit grew 65.5% from the year-ago value to $2.58 million. The company’s income from operations came in at $106.74 thousand, compared to a loss from operations of $1.04 million in the prior year’s quarter.
Furthermore, the company’s net income and earnings per share were $206.04 thousand and $0.03, compared to a net loss and loss per share of $1.15 million and $0.17 in the same period of 2022, respectively.
Analysts expect DTST’s revenue for the fiscal year (ending December 2024) to increase 7.9% year-over-year to $26 million. The company’s EPS for the same period is expected to grow 90% from the prior year to $0.19. Moreover, it has topped the consensus revenue estimates in three of the trailing four quarters.
Shares of DTST have gained 102.2% over the past six months and 139.5% year-to-date to close the last trading session at $3.64.
DTST’s POWR Ratings reflect bright prospects. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
DTST has an A grade for Sentiment and a B for Growth. It is ranked #12 out of 57 stocks in the Internet industry.
In addition to the POWR Ratings I’ve just highlighted, you can see DTST’s ratings for Value, Stability, Momentum, and Quality here.
Stock #2: LY Corporation (YAHOY)
Headquartered in Tokyo, Japan, YAHOY is an internet company that engages in diverse businesses, including search, portal website, e-commerce, communications, and advertising. Additionally, the company provides membership and payment-related services.
YAHOY’s gross profit margin of 69.83% is 41.5% higher than the 49.37% industry average. And the stock’s net income margin of 11.15% is 170.1% higher than the 4.13% industry average. Moreover, its trailing-12-month levered FCF margin of 18.21% is 116.8% higher than the 8.40% industry average.
In terms of trailing-12-month P/E, YAHOY is currently trading at 15.50x, 4.4% lower than the industry average of 16.21x. Also, the stock’s trailing-12-month Price/Book of 1x is 36.2% lower than the industry average of 1.57x.
YAHOY’s revenue and EBITDA have increased at CAGRs of 16.3% and 6.9%, respectively, over the past three years. The company’s net income has grown at a CAGR of 35.3% over the same period. In addition, its EPS and total assets have improved at respective CAGRs of 16.2% and 28.5%.
YAHOY’s revenue increased 10.2% year-over-year to ¥430.52 billion ($2.89 billion) for the first quarter that ended June 30, 2023. Its operating income grew 19.5% from the year-ago value to ¥59.40 billion ($398.86 million). Also, the company’s adjusted EPS was ¥99.99 billion ($671.41 million), up 15.6% from the prior year’s quarter.
In addition, net income attributable to owners of the parents rose 47.9% from the previous year’s period to ¥37.32 billion ($250.60 million) and its adjusted earnings per share came in at ¥4.81, an increase of 34.7% year-over-year.
Street expects YAHOY’s revenues for the fiscal year (ending March 2024) to increase significantly year-over-year to $12.36 billion. For the fiscal year 2024, the consensus revenue estimate of $13.44 billion indicates an 8.7% rise year-over-year.
YAHOY’s stock has gained 9% year-to-date and 4.4% over the past year to close the last trading session at $5.43.
YAHOY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
The stock has a B for Stability. It is ranked #10 in the same industry.
Click here for YAHOY’s additional POWR Ratings (Momentum, Quality, Growth, Sentiment, and Value).
Stock #1: Expedia Group, Inc. (EXPE)
EXPE is a global online travel company with a diverse brand portfolio, providing a range of travel-related services and accommodations. It operates through Retail; B2B; and trivago segments. Also, it offers advertising and media services and serves leisure and corporate travelers, including travel agencies, tour operators, and travel supplier direct websites.
On July 25, EXPE teamed up with Walmart Inc. (WMT) to launch a travel benefit for Walmart+ members. Travel booking on WalmartPlusTravel.com is powered by Expedia Group’s White Label Template technology, providing Walmart+ members access to more than 900,000 properties, 500+ airlines, 100+ car rental companies and thousands of activities around the world.
This new offering will allow Walmart+ members to earn Walmart Cash on all aspects of their vacation getaways. This partnership is expected to extend EXPE’s reach while enhancing the travel booking experience through its technology.
On July 17, EXPE launched a loyalty program, One Key™, bringing the company’s three flagship travel brands, namely Expedia®, Hotels.com®, and Vrbo®, under a single platform. The company might benefit from this program by simplifying travel rewards for its customers.
EXPE’s trailing-12-month gross profit margin of 86.23% is 143.5% higher than the industry average of 35.41%. Similarly, the stock’s trailing-12-month net income margin of 7.33% is 66.8% higher than the industry average of 4.40%.
Over the past three years, EXPE’s revenue has increased at a CAGR of 10.5%, while its EBITDA has grown at a CAGR of 192.2%. Also, the company’s total assets have improved at a CAGR of 5.4% over the same period.
For the second quarter ended on June 30, 2023, EXPE’s revenue increased 5.6% year-over-year to $3.36 billion. Its operating income rose 28.4% from the year-ago value to $443 million. Also, the company’s adjusted EBITDA grew 15.3% from the prior year’s quarter to $747 million.
Additionally, the company’s adjusted net income and adjusted earnings per share came in at $428 million and $2.89, representing increases of 38.1% and 47.4% year-over-year, respectively.
Analysts expect EXPE’s revenue and EPS for the fiscal year 2023 to increase 10% and 40% year-over-year to $12.82 billion and $9.50, respectively. For the fiscal year 2024, the company’s revenue and EPS are estimated to grow 9.1% and 24.7% from the prior year to $13.98 billion and $11.85, respectively.
The stock has gained 12.9% over the past six months and 18.2% year-to-date to close the last trading session at $103.61.
EXPE’s strong prospects are apparent in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system.
EXPE has an A grade for Value and Quality and a B for Momentum. The stock is ranked #6 of 57 stocks in the Internet industry.
To access EXPE’s ratings (Growth, Stability, and Sentiment), click here.
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.
AMZN shares were trading at $133.89 per share on Thursday morning, up $2.06 (+1.56%). Year-to-date, AMZN has gained 59.39%, versus a 15.16% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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