In this article, I evaluated two internet stocks, Amazon.com, Inc. (AMZN) and Etsy, Inc. (ETSY), to determine which has the potential for better returns. We believe AMZN is the better investment for reasons explained throughout this piece.
The COVID-19 pandemic has sped up digital transformation by several months and years. The Internet has drastically changed how we live – as humans and customers, and how businesses must evolve to improve customer experience and keep up with the rapid digital transformation.
The Internet has revolutionized how people learn, work, communicate, shop, entertain, socialize, travel, and manage finances. As of October 2023, there were nearly 5.3 billion internet users worldwide, accounting for 65.7% of the global population.
With the significant surge in internet usage, demand for remote work tools, virtual communication, e-commerce, video streaming services, and payment services and systems has increased exponentially. The global e-commerce market is expected to reach $70.90 trillion by 2028, growing at a CAGR of 27.4% during the forecast period (2023-2028).
The widespread adoption of several online retail platforms, the expansion of cross-border trade opportunities, and the introduction of secure digital payment systems are major factors contributing to the e-commerce market growth.
Favorable government policies and funding to make the Internet widely accessible should drive the Internet industry’s prospects. The Biden-Harris Administration allocated $42.45 billion through the Broadband Equity, Access, and Deployment (BEAD) Program to expand high-speed internet access by funding planning, infrastructure deployment, and adoption plans.
Furthermore, the expansion and growth of the internet industry are propelled by the growing adoption of 5G technology, which provides high-speed and reliable internet connectivity. Global 5G subscriptions are estimated to reach 1.9 billion by 2023. The figure is forecast to grow to 2.8 billion by 2024 and 5.9 billion by 2027.
The internet industry’s bright prospects should benefit AMZN and ETSY significantly.
AMZN is a clear winner in one-month price performance, with 11% returns compared to ETSY’s 2% gain. AMZN climbed 34.5% over the past six months compared to ETSY’s 28.9% decline. In addition, AMZN gained 56.9% over the past year, while ETSY plunged 35.5%.
Here are the reasons why we think AMZN could perform better in the near term:
Recent Financial Results
For the third quarter that ended September 30, 2023, AMZN’s net sales increased 12.6% year-over-year to $143.08 billion. Its operating income grew 343.1% from the year-ago value to $11.19 billion. Its income before income taxes was $12.19 billion, up 314% from the prior year’s quarter. The company’s net income rose 244% year-over-year to $9.88 billion.
Furthermore, the company’s earnings per share came in at $0.94, an increase of 235.7% year-over-year. As of September 30, 2023, its total assets stood at $486.88 billion, compared to $462.68 billion as of December 31, 2022.
ETSY’s revenue increased 7% year-over-year to $636.30 million for the third quarter that ended September 30, 2023. Its gross profit rose 6.5% from the year-ago value to $447.48 million. Its income from operations came in at $88.56 million, compared to a loss from operations of $954.78 million in the previous year’s quarter.
In addition, ETSY’s adjusted EBITDA was $182.220 million, an increase of 8.6% from the prior year’s period. Its net income was $87.85 million, or $0.64 per share, compared to a net loss of $963.07, or $7.62 per share a year ago, respectively.
Past And Expected Financial Performance
AMZN’s revenue and EBITDA have grown at respective CAGRs of 16.8% and 19.2% over the past three years. Its net income and EPS have increased at CAGRs of 4.9% and 3.9%, respectively. Additionally, the company’s total assets have grown at a CAGR of 19.9% over the same time frame.
Analysts expect AMZN’s revenue and EPS for the fourth quarter (ending December 2023) to increase by 11.2% and 2,421.2% year-over-year to $165.86 billion and $0.76, respectively. Likewise, the company’s revenue and EPS for the fiscal year 2024 are expected to grow 11.4% and 28.5% from the previous year to $635.79 billion and $3.42, respectively.
Over the past three years, ETSY’s revenue and EBITDA have grown at CAGRs of 25.3% and 9.3%, respectively. Its net income has improved at a CAGR of 12.9% over the same timeframe. Also, the company’s EPS has increased at a CAGR of 9.8% over the same period, while its total assets have grown at a 3.4% CAGR.
For the fourth quarter ending December 2023, ETSY’s revenue and EPS are expected to grow 1.7% and 16.2% year-over-year to $820.69 million and $1.33, respectively. Analysts expect the company’s revenue and EPS for the second quarter (ending June 2024) to increase 4.6% and decline 27.5% year-over-year to $657.50 million and $1.07, respectively.
AMZN’s trailing-12-month revenue is 204.4 times what ETSY generates. However, ETSY is more profitable, with a trailing-12-month gross profit margin of 70.56% compared to AMZN’s 46.24%. Also, ETSY’s trailing-12-month EBIT margin and net income margin of 13.81% and 12.30% are higher than AMZN’s 4.77% and 3.62%, respectively.
In addition, ETSY’s trailing-12-month ROA and ROTC of 14.78% and 13.19% are higher than AMZN’s 3.26% and 5.08%, respectively. ETSY’s trailing-12-month levered FCF margin of 20.61% compared to AMZN’s 6.57%.
In terms of forward P/E, ETSY is currently trading at 27.13x, 49.4% lower than AMZN, which is trading at 53.59x. ETSY’s forward EV/EBITDA multiple of 12.44 is lower than AMZN’s 14.93. However, AMZN’s forward EV/Sales of 2.76x is lower than ETSY’s 3.38x.
AMZN has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. Conversely, ETSY has an overall rating of C, translating to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. AMZN has a grade of A for Sentiment, consistent with optimistic analyst expectations. On the other hand, ETSY has a D grade for Sentiment, in sync with its unfavorable analyst estimates.
Of the 58 stocks in the Internet industry, AMZN is ranked #14, while ETSY is ranked #40.
The rapid global digital transformation has led to a sudden increase in internet usage. Increased internet usage boosted demand for online activities like virtual communication and engagement, e-commerce, remote work and online learning tools, digital payments, and video streaming, creating several opportunities for companies in the internet industry.
Thus, internet stocks AMZN and ETSY are expected to benefit considerably from the industry’s tailwinds. However, ETSY’s relatively weak price performance, limited growth, and bleak near-term outlook make its rival, AMZN, the better buy now.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Internet industry here.
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AMZN shares were unchanged in premarket trading Thursday. Year-to-date, AMZN has gained 69.01%, versus a 15.96% 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. More...
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