3 Internet Delivery Stocks to Watch in a Tough Industry

Internet – Delivery Services
come on daddy
GDDY
Quin Street
QNST
Asure Software
ASUR

Description of the industry

The Zacks Internet – Delivery Services industry primarily includes companies that offer services through Internet-based platforms. These include food delivery, online travel booking, direct marketing and media services, and web hosting, among others. Some companies in this space offer Internet domain registration and web hosting registration, as well as the sale of e-commerce related software and services. A few industry participants offer air and train ticket reservations, personalized vacation packages, hotel reservations, bus tickets, and car rental services. Some players offer direct marketing and online media services, including online messaging, email distribution, search engine marketing, and brand management facilities. As growth-stage companies, industry players spend more on R&D and sales and marketing, which makes it difficult to generate short-term profits.

4 Trends Shaping the Future of the Internet Delivery Service Industry

Key Drivers of Smartphone and Internet Penetration: The internet is ubiquitous and the growing use of smartphones is changing the delivery landscape. Companies in the Zacks Internet – Delivery Services segment are benefiting from the growing number of Internet users, coupled with improving Internet penetration and the rapid adoption of 4G Volte technology. The emergence of 5G technology, which promises faster speed and deliverability, also bodes well for this industry.

Changing consumer preferences: Changing consumer preferences, driven by convenience and ease of access, should help the industry. Notably, the accelerated shift from offline food ordering to online food ordering as well as the growing penetration of online travel booking bodes well for industry players. Nonetheless, given that a higher appetite for consumer spending is the main driver of the industry’s overall health, any downturn in the global economy will present a risk.

Higher upfront costs to hurt profitability: Online delivery has yet to expand beyond major cities, pointing to lower penetration and significant room for growth. However, as expansion into new markets will take time to generate volumes, higher upfront costs could erode profitability. Additionally, Amazon’s focus on strengthening its delivery system is a major challenge for industry players. We believe that the company’s powerful distribution channels are a major force that could pose a serious threat to incumbents in this industry. Additionally, search giant Alphabet has made a foray into the food delivery market, with its delivery arm, Wing and a range of food delivery apps, which are likely to further intensify competition.

The evolving COVID-19 situation will hurt near-term growth: The near-term outlook for the industry looks bleak due to the pandemic-induced social distancing measures enacted by governments around the world. There are travel restrictions in most countries, which greatly affect online travel and hotel booking companies. Apart from this, online food delivery businesses have been hit hard as restaurant providers in several parts of the world have been ordered to shut down their operations. Also, because people are staying indoors, they now have more time to cook, which translates to less need for food outdoors. Additionally, with the emergence of the more contagious variant of the coronavirus—Omicron—several parts of the world (Australia, United Kingdom, and Europe) and parts of the United States are experiencing a massive increase in infection rates. , leading to strict containment measures. This could lead to new restrictions on travel and hotel openings. Uncertainty about company visibility could hurt industry performance in the period ahead. Nonetheless, online travel and hotel bookings, as well as online food delivery businesses, are poised to rebound once normalcy returns.

Zacks’ industry rankings point to bleak prospects

The Internet – Delivery Services industry is housed within the broader framework IT and technology sector. It carries a Zacks industry ranking of #240, which places it in the bottom 6% of over 250 Zacks industries.

That of the group Zacks Industry Ranking, which is essentially the average Zacks Ranking of all member stocks, indicates a bleak short-term outlook. 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.

Despite the bleak outlook for the industry, there are a few stocks worth watching in the market. But before outlining the industry’s top picks, it’s worth taking a look at industry shareholder returns and current valuation.

Industry underperforms stock market performance

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

The industry lost 44.3% during this period, while the S&P 500 and the broader sector gained 18.9% and 7.5% respectively.

Year-over-year price performance

Current industry assessment

Based on the 12-month forward price-to-sales (P/S) ratio, a multiple commonly used to value internet delivery stocks, the industry is currently trading at 0.57X versus the S&P’s 4.59X. 500 and sector 4.62X.

Over the past five years, the industry has traded as low as 1.29X, as low as 0.57X and recorded a median of 0.92X as seen in the charts below.

Price to sales ratio (industry vs S&P 500)

Price to sales ratio (industry vs sector)

3 stocks to watch

Come on dad: It is an Internet domain registrar and web hosting company that also sells e-business related software and services. This Zacks #3 (Hold) ranking company is engaged in the design and development of cloud-based technology products for small businesses, web design professionals, and individuals. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

GoDaddy thrives on the growing adoption of its domain products. Higher website + marketing subscriptions and managed WordPress plans, international expansion, robust feature commitments, and the strength of GoCentral are tailwinds for the company’s hosting and presence business.

Additionally, the acquisition of payment processing company Poynt has strengthened GoDaddy’s business offerings and given it an edge over its competitor, Shopify. Additionally, the acquisition of Neustar’s Registry business last year made the company one of the biggest players in the Internet infrastructure industry.

The Zacks consensus estimate for 2022 earnings has moved 10 cents north to $2.01 per share over the past 30 days.

Pricing and Consensus: GDDY

Quin Street: It is a provider of direct marketing and online media services. QuinStreet offers online messaging, email distribution, search engine marketing, and brand management services.

QuinStreet is benefiting from the accelerated shift from offline to online business model across all industries. Ad spending is expected to improve this year as vaccine rollouts help countries reopen for business and trade. The company is well placed to capitalize on this opportunity and acquire new customers and high value-added offers.

Apart from that, divestments in 2020 of underperforming businesses including educational media, client and campaign assets helped the company focus on its high-growth businesses. Additionally, the acquisition of Modernize in July 2020 expanded QuinStreet’s Home Services business.

QuinStreet carries a Zacks rank of 3 at present. Zacks’ consensus estimate for fiscal 2022 earnings has been flat at 82 cents per share for the past 60 days.

Pricing and Consensus: QNST

Asure Software: It’s a cloud computing company that offers enterprise customers the ability to modernize everything from human capital management (HCM) to time and attendance solutions, payroll and taxes. The stock currently carries a No. 3 Zacks rank.

Asure Software’s strategic move to become a pure software-as-a-service (SaaS) HCM company is contributing to its revenue growth. The company’s focus on driving innovation for its HCM solutions is helping it expand its footprint in the HCM market.

New customer additions and continued focus on cross-selling to existing customers are driving Asure Software’s revenue. The company’s differentiated employee strategy, measurement capabilities, and comprehensive product offerings help it win new customers.

Zacks’ consensus estimate for Asure Software’s 2022 earnings has been flat at 12 cents per share for the past 60 days.

Pricing and Consensus: ASUR

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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.