Pandemic-induced travel restrictions and social distancing measures have hurt the Zacks Internet – Delivery Services industry. Nevertheless, a recovery is expected for companies like come on daddy (GDDY – free report), MakeMyTrip (MMYT – free report), Quin Street (QNST – free report) and Asure Software (ASSYRIAN – Free Report) as most countries reopened their economies and lifted travel bans. Additionally, a greater Internet presence in emerging markets, a growing affluent middle class, and accelerating smartphone adoption will help participants in the Internet delivery service industry.
However, high marketing expenses due to planned expansion into new delivery markets will weigh on margins in the near term. Additionally, surging infection rates in several parts of the world due to the new variant of COVID-19, which has resulted in strict lockdowns, may affect the recovery of industry players. Additionally, the lingering effects of pandemic-induced corporate volatility are concerning.
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 industry’s short-term outlook could be affected by a resurgence of COVID-19 cases in China, Europe and India. Countries experiencing an increase in coronavirus cases could impose new lockdowns and travel bans, disrupting all business operations. Uncertainty about corporate visibility could hurt industry performance in the short term. Nonetheless, online travel and hotel bookings, as well as online food delivery businesses, are poised to rebound once normalcy returns.
Zacks’ Industry Rankings Indicate Bright Prospects
The Internet – Delivery Services industry is part of the broader IT and technology sector. It carries a Zacks Industry Ranking of #106, which places it in the top 42% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is essentially the average of the Zacks ranking of all member stocks, indicates a strong near-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.
The industry’s positioning in the top 50% of industries ranked by Zacks is the result of a positive earnings outlook for the constituent companies overall. Before outlining a few stocks you might want to consider for your portfolio given the promising outlook, let’s take a look at recent stock market performance and the valuation picture of the industry.
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 29.5% during this period, while the S&P 500 and the broader sector are down 5.2% and 17.2%, 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 0.78X versus the S&P’s 3.90X. 500 and sector 3.67X.
Over the past five years, the industry has traded as low as 1.29X, as low as 0.57X and recorded a median of 0.90X as seen in the charts below.
Price to sales ratio (industry vs S&P 500)
Price to sales ratio (industry vs sector)
4 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.
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.
Zacks’ consensus estimate for 2022 earnings has been revised down a few cents to $2.15 per share over the past 30 days.
Pricing and Consensus: GDDY
MakeMyTrip: It is an online travel services company, which offers travel products and solutions in India and the United States. The Company’s services and products include air tickets, personalized vacation packages, hotel reservations, train tickets, bus tickets, car rentals and insurance access facilitation. travel.
MakeMyTrip is benefiting significantly from improving travel conditions and reopening economies. In addition, the recovery in hotel demand, due to the increase in short-term holidays, attractive travel offers and hygienically safe properties, is a major plus. Additionally, this Zacks No. 3-ranked company is optimistic about its cost-control initiatives, MySafety and GoSafe programs, and strengthening hotel business.
Zacks’ consensus estimate for fiscal 2023 earnings has been revised up 15 cents to 27 cents per share in 30 days.
Pricing and Consensus: MMYT
QuinStreet is benefiting from the accelerated shift from an offline to an 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 was revised down to 35 cents per share from 40 cents 30 days ago.
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 revised up by a few cents to 11 cents per share over the past 30 days.
Pricing and Consensus: ASUR