3 Internet stocks to watch in a thriving industry – April 11, 2022

The Zacks Internet – Content the industry is benefiting from the reopening of economies, leading to increased advertising spending. The pandemic has opened up new growth channels for Internet content providers. Industry players have witnessed strong demand for e-commerce services from homebound consumers amid lockdowns and travel restrictions. Additionally, the resurgence of digital ad spending is a key catalyst. Industry participants like Airbnb (ABNB Free report) , Yelp (YAP Free report) and Perion networks (PERI Free report) are benefiting from strong demand for digital offerings as well as the growing importance of video content and cloud-based applications. These companies are also expanding their presence across social media, display and connected TV, and search, driving revenue growth.

Description of the industry

The Zacks Internet – Content industry includes providers of video encoding platform, personal services, Internet content and information, staffing and outsourcing services, publishing, capital markets, multimedia services, home services, digital information and measurement, photo, video and music licensing and online travel agencies. The industry is witnessing a rapid change in consumer behavior and ongoing digitalization. Advertising is a major source of income for industry players, so these companies are trying to expand their digital presence in order to gain 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 launches and ever-changing standards. A growing range of mobile, digital and cloud-based offerings by industry players is a major growth driver. Additionally, the proliferation of smart devices and increasing automation of the app development process bodes well.

The recovery in advertising spending bodes well: Industry participants focus on marketing efforts to increase traffic to websites. Advertising and subscriptions are the main sources of income for these companies. Additionally, the industry depends on consumer spending trends, which makes holiday spending a major deciding factor. As economies reopen, advertising spending picks up, which bodes well for industry players.

Increased Regulation Mars Outlook: Industry players, involved in online search and other social networking activities, are increasingly facing regulatory pressures, particularly in China, Russia and the European Union (EU) . The Chinese government has a number of regulations relating to direct advertising, which is a key source of revenue for these companies. Additionally, the implementation of the General Data Protection Regulation, which came into force on May 25, 2018 in the EU, adds to concerns. Additionally, the California Consumer Privacy Act (CCPA), which among other things restricts sales of user data, is a headwind for industry players.

Zacks’ Industry Ranking Indicates Strong Prospects

The Zacks Internet – The content industry is housed in the wider Zacks IT and technology sector. It carries a Zacks Industry Ranking of #83, which places it in the top 33% of over 250 Zacks industries.

That of the group Zacks Industry Ranking, which is essentially the average of the Zacks Ranking of all member stocks, indicates a bullish outlook in the near term. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.

Before outlining a few stocks you might consider for your portfolio, let’s take a look at recent stock market performance and the industry valuation picture.

The industry lags behind shareholder returns

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

The industry fell 28.6% during this period compared to the 9.1% rise in the S&P 500 and the 3.5% decline in the broader sector.

Year-over-year price performance

Current industry assessment

Based on the trailing 12-month price-to-sales (P/S) ratio, which is a multiple commonly used to value Internet – Content stocks, we see that the sector is currently trading at 8.63X against the S&P 500. 4.38X and the sector’s 12-month P/S of 4.07X.

Over the past five years, the industry has traded as low as 18.18X, as low as 2.82X and at the median of 8.71X, as seen in the chart below.

Rolling 12-month price-to-sales (P/S) ratio

3 Internet stocks to watch

Perion network: This Israel-based global technology company provides online advertising and search monetization solutions 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 advertisements across a portfolio of websites and mobile applications.

Perion is banking on strong growth in advertising revenue. The recovery in advertiser spending and the surge in e-commerce ad spend are key catalysts. Perion should benefit from the solid performance of its Search business, driven by strong demand from advertisers.

The Zacks consensus estimate for 2022 earnings for this Tier 2 (buy) Zacks company has held steady at $1.17 per share over the past 30 days. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Perion shares have gained 6.2% since the start of the year.

Pricing and Consensus: PERI

Yelp: This company based in San Francisco, California is a website engaged in providing information through an online community offering social networks. It covers restaurants, shopping, nightlife, financial services, health, and a variety of services.

Yelp is benefiting from the reopening of economies resulting in increased ad spend, increased paid ad placements and improved long-term customer retention.

Yelp is seeing an acceleration in consumer traffic across devices unique to apps. The significant improvement in cumulative ratings is also encouraging. Yelp’s continued focus on expanding its product portfolio with the launch of Verified License, Business Highlights, Yelp Portfolios and Yelp Fusion is a key growth driver.

Zacks’ consensus estimate for Yelp’s earnings in 2022 has remained at $1.06 per share for the past 30 days. Shares of this company Zacks Rank #3 (Hold) are down 6.7% year-to-date.

Pricing and Consensus: YELP

Airbnb: This San Francisco, Calif.-based online travel agency is banking on the resumption of long-distance and cross-border travel. The growth in average daily rates remains a tailwind. The growth of active listings in Latin America, North America and the EMEA region contributes well to this.

Airbnb, which currently has a No. 3 Zacks rating, should see an improvement in bookings and traffic trends.

Zacks’ consensus estimate for Airbnb’s 2022 earnings rose 5.6% to $1.50 per share in the past 30 days. Airbnb shares are down 2.3% year-to-date.

Pricing and Consensus: ABNB

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