The COVID-19 pandemic accelerated the pace of digital transformation worldwide as individuals and businesses relied increasingly on technology to remain functional. The trend has created enormous opportunity for most tech companies because the widespread growth of internet adoption was seen in many, untapped, parts of the world. As most pandemic-driven challenges and trends are expected to continue this year, we believe internet stocks should continue to dominate the broader market.

However, most of these stocks are now trading at lofty valuations and it makes sense for investors to now pick stocks very judiciously. Relatively undervalued stocks that have the capacity to generate huge returns in the long run based on their market strength and continued revenue growth are probably the best bets now.

Given this favorable backdrop, eBay Inc. (EBAY) and Yelp Inc. (YELP) are two internet stocks that went relatively unnoticed by investors and have not performed equally with the names at the top of the tech wave. However, we think these two stocks are poised to deliver solid returns this year.

eBay Inc. (EBAY)

EBAY is a global commerce leader that operates an online marketplace platform that connects buyers and sellers in more than 190 countries worldwide. Founded in 1995, the EBAY platform enables users to list, buy, sell, and pay for items and facilitate payments on behalf of users, merchants, retailers, and brands.

E-commerce emerged as one of the winners in the coronavirus pandemic last year as lockdowns and store closures forced people to transact online.  EBAY responded by implementing  several strategies to make the platform more user-friendly for both buyers and sellers. EBAY introduced tools and resources to help small businesses, including the  simplification of registering and enabling storefronts. It also introduced QR coding to make pick-ups contactless and more efficient and focused on “non-new in-season” products to better utilize its existing platform communities.

In 2020, EBAY  witnessed volume growth that was more than the growth of its prior seven fiscal years combined. In the fourth quarter, ended December 31, 2020, the company reported revenue of $2.87 billion, surging 28% year-over-year, because of its  integration of payments and promoted listings. FX-adjusted gross merchandise volume gained 18% year-over-year to hit $26.6 billion. In addition, the e-commerce giant added two  million buyers during the quarter, with the total hitting  185 million. Its non-GAAP EPS came in at $0.86, rising 31% year-over-year.

The stock has gained more than 65% over the past year. The  company garnered robust market share in 2020 and management is prepared to spend aggressively this year to defend that share. EBAY  has issued a bullish outlook for the current quarter. Its CEO believes, “Our advertising business will continue to outpace volume through promoted listings and other products.” In line with EBAY’s expanding marketplace, Wall Street analysts estimate the company’s current-year revenue and EPS to increase 14.9% and 78%, respectively, year-over-year.

EBAY’s POWR Ratings reflect this promising outlook. EBAY has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

It has a grade of A for Quality. It is ranked #11 of 67 stocks in the Internet industry.

In total, we rate EBAY on eight different levels. Click here to check additional POWR Ratings for EBAY (Value, Growth, Stability, Momentum, and Sentiment).

Yelp Inc. (YELP)

YELP operates a platform that connects consumers with local businesses in the U.S. , Canada, and internationally. The company’s platform covers various local business categories, including restaurants, shopping, home and local services, beauty and fitness, health, and other categories. It provides free and paid advertising products to businesses and enables businesses to deliver targeted search advertising to local audiences through its website and mobile application and business listing products.

The firm has been deeply impacted by  the pandemic-induced slowdown in restaurant businesses. As a result, its web search traffic for reading or posting online recommendations for restaurants declined significantly. However, its Home & Local Services witnessed strength in  recommendations for gardeners, plumbers and electricians, which surged  when people turned to the platform for ways to ease their stay-at-home lifestyles.

As mass COVID-19 vaccination drives pick up pace, YELP  management believes  restaurants and other small businesses will  rebound strongly. The company has responded to  anticipated demand by reconfiguring its business with additional features on the app. YELP  introduced a new feature last month that will allow users to rate restaurants’ safety precautions and sanitary measures related to COVID-19.

2020 was  tough year for YELP. The company suffered losses in the first three quarters of 2020. However, its fourth quarter earnings were better.  YELP reported a top line of $233.2 million, rising 5.6% sequentially. Its revenue from its transactions segment increased 37.5% year-over-year, driven primarily by a higher volume of food take-out and delivery orders, notably through the company’s partnership with GrubHub Inc. (GRUB). Its adjusted EBITDA margin came in at 26% as YELP successfully increased monetization in Home & Local Services and completed the realignment of its go-to-market channels. This drove more revenue growth through its Self-Serve channel. The company delivered EPS of $0.28, compared to the quarter-ago loss of $0.01 per share. The stock has gained 62% over the past six months.

YELP has more than 224 million cumulative reviews on its platform with nearly 520,000 paying advertising locations. Experts believe a strong revival in customer advertising budgets and, consequently, YELP’s management is confident in its ability to return to sustainable revenue growth this year. Wall Street analysts  expect YELP’s current year revenues to improve 14.3% year-over-year.

It is no surprise that YELP has an overall rating of B, which equates to Buy in our POWR Ratings system. YELP has a grade of A for both Value and Quality. It is ranked #9 in the Internet industry.

Click here to see the additional POWR Ratings for YELP (Growth, Momentum, Stability, and Sentiment).

The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

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EBAY shares were trading at $63.85 per share on Tuesday morning, up $0.84 (+1.33%). Year-to-date, EBAY has gained 27.06%, versus a 5.34% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...

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