The Internet industry is well-positioned for long-term growth, with more people and businesses using digital services after the pandemic. Internet companies offer enhanced services to businesses and consumers amid growing demand for digital solutions.

In this piece, I have discussed the reasons why I think internet stocks LegalZoom.com, Inc. (LZ), Solo Brands, Inc. (DTC), and trivago N.V. (TRVG) are performing better than Netflix, Inc. (NFLX) and could be wise to buy these stocks.

At the beginning of the third quarter in 2023, about 5.19 billion people worldwide were using the internet, which is 64.4% of the global population. Additionally, global 5G connections are on track to exceed 1.90 billion by year-end, with forecasts projecting around 6.80 billion 5G connections by the end of 2027.

In the second quarter, NFLX’s EPS came 15.2% above analyst estimates, while its revenue missed the consensus estimate by 1.2%. Its revenue for the second quarter ended June 30, 2023, rose 2.7% year-over-year to $8.19 billion. Its net income increased 3.2% over the prior-year quarter to $1.49 billion. Also, its EPS came in at $3.29, representing an increase of 2.8% year-over-year.

The company is facing tough competition in the video streaming industry. More companies are entering the market, and Netflix’s dominant position is being challenged.

Amid the competitive streaming market, NFLX is trying to cut costs and boost engagement. The company’s subscriptions rose 8% in the second quarter. Amid its crackdown on password sharing in the U.S., the company added 5.89 million customers during the second quarter.

The streaming giant guided for a third-quarter revenue of $8.52 billion, but it was below analyst expectations of $8.67 billion. The company expects a revenue boost in the second half of the year driven by its ad-supported plan and paid sharing.

NFLX is also trading at an expensive valuation. In terms of forward EV/EBITDA, NLFX’s 27.74x is 232.1% higher than the 8.35x industry average. Likewise, its 6.09x forward EV/Sales is 216.9% higher than the 1.92x industry average

Although analysts expect a 7.7% and 12.9% year-over-year increase in revenue and EPS for NFLX in the third quarter, it’s noteworthy that the company has disappointed by failing to top revenue estimates in three of the four trailing quarters.

NFLX remains confident of growing its topline this year through its new initiatives. However, with NFLX trading at an expensive valuation and the breakdown of revenue from its new initiatives like the ad-supported tier and new password policy unavailable at the moment, it is still worth determining how effective these initiatives have been. Therefore, it could be wise to wait for a better entry point in the stock.

Considering all these factors, LZ, DTC, and TRVG could be better buys than NFLX to capitalize on the industry tailwinds. To that end, let us dive into the fundamentals of these three Internet industry picks, beginning with the third choice.

Stock #3: LegalZoom.com, Inc. (LZ)

LZ operates an online platform for legal and compliance solutions. The company’s platform offers products and services, including business formations, creating estate planning documents, protecting intellectual property, completing certain forms and agreements, providing access to independent attorney advice, and connecting customers with experts for tax preparation and bookkeeping services.

On August 3, 2023, LZ announced the launch of ‘LZ Books,’ an online accounting solution for small business owners, particularly solopreneurs. LZ Books simplifies accounting and tax management, offers various features, and comes with a budget-friendly pricing plan starting at $9.99 per month, along with a 30-day free trial and access to a CPA for a limited time.

Dan Wernikoff, CEO at LZ, said, “Our expanded service offerings now provide a one-stop solution, from business formation to financial management, ensuring small business owners can rely on us as their go-to legal and accounting advisor.”

In terms of the trailing-12-month gross profit margin, LZ’s 65.15% is 115% higher than the 30.30% industry average. Likewise, its 11.71% trailing-12-month levered FCF margin is 114.1% higher than the 5.47% industry average. Furthermore, its 1.48x trailing-12-month asset turnover ratio is 82.3% higher than the 0.81x industry average.

LZ’s revenue for the second quarter ended June 30, 2023, increased 3.8% year-over-year to $168.85 million. The company’s non-GAAP net income rose 98.9% year-over-year to $19.04 million.

Also, its adjusted EBITDA increased 64% year-over-year to $29.65 million. Additionally, its non-GAAP net income per share came in at $0.10, representing an increase of 100% year-over-year.

For the quarter ending September 30, 2024, LZ’s EPS and revenue are expected to increase 75.5% and 3.8% year-over-year to $0.09 and $160.29 million, respectively. It surpassed the consensus EPS estimates in each of the four trailing quarters. The stock has gained 30.4% year-to-date to close the last trading session at $10.09.

LZ’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has a B grade for Growth and Quality. Within the Internet industry, it is ranked #12 out of 60 stocks. To see LZ’s Value, Momentum, Stability, and Sentiment ratings, click here.

Stock #2: Solo Brands, Inc. (DTC)

DTC operates a direct-to-consumer platform that offers outdoor and lifestyle branded products in the United States. The company provides camp stoves under the brand names Solo Stove Lite, Solo Stove brand name, Oru, ISLE, and storage solutions for fire pits, firewood, and other accessories.

On May 11, 2023, DTC announced its acquisition of TerraFlame, a company dedicated to creating warm and inviting spaces through clean-burning flames. John Merris, CEO at DTC, said, “This strategic acquisition complements our brands and, alongside Solo Stove, allows us to offer our customers the fire burning experience outdoors, and with the addition of TerraFlame, we’re thrilled to bring the fire inside.

“We hope to leverage our direct-to-consumer and wholesale expertise to support TerraFlame’s growth while also leaning into TerraFlame’s shared passion for product innovation and incredible products to elevate the Solo Brands customer experience,” he added.

In terms of the trailing-12-month gross profit margin, DTC’s 61.73% is 74.2% higher than the 35.45% industry average. Likewise, its 12.34% trailing-12-month EBITDA margin is 13.1% higher than the 10.92% industry average. Furthermore, the stock’s 16.92% trailing-12-month levered FCF margin is 233.2% higher than the 5.08% industry average.

DTC’s net sales for the second quarter ended June 30, 2023, came in at $130.93 million. Its adjusted gross profit came in at $83.07 million. Its income from operations came in at $11.07 million, compared to a loss from operations of $19.94 million in the year-ago quarter. The company’s adjusted net income rose 3% year-over-year to $17.88 million.

In addition, its adjusted EPS came in at $0.22. Also, its adjusted EBITDA rose 5.6% year-over-year to $24.99 million.

Analysts expect DTC’s revenues for the quarter ending September 30, 2023, to increase 2.8% year-over-year to $105.04 million. Its EPS for the quarter ending December 31, 2023, is expected to increase 33.4% year-over-year to $0.44. It surpassed the Street EPS estimates in each of the four trailing quarters. The stock has gained 40.9% year-to-date to close the last trading session at $5.24.

DTC’s promising outlook is reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.

It has a B grade for Growth, Value, and Quality. Within the same industry, it is ranked #9. In total, we rate DTC on eight different levels. Beyond what we stated above, we also have given DTC grades for Momentum, Stability, Sentiment, and Industry. Get all the DTC ratings here.

Stock #1: trivago N.V. (TRVG)

Headquartered in Düsseldorf, Germany, TRVG, together with its subsidiaries, operates a hotel and accommodation search platform in the United States, Germany, the United Kingdom, and internationally. It offers an online meta-search for hotels and accommodation through online travel agencies, hotel chains, and independent hotels.

In terms of the trailing-12-month Return on Total Capital, TRVG’s 6.56% is 88% higher than the 3.49% industry average. Its 13% trailing-12-month EBIT margin is 52.4% higher than the 8.53% industry average. Likewise, its 0.70x trailing-12-month asset turnover ratio is 43.5% higher than the industry average of 0.48x.

TRVG’s total revenue for the second quarter ended June 30, 2023, came in at €124.40 million ($133.09 million). Its operating income came in at €8.60 million ($9.20 million), compared to an operating loss of €59.80 million ($64 million). The company’s net income came in at €5.80 million ($6.21 million), compared to an net loss of €59.80 million ($64 million).

In addition, its adjusted EBITDA came in at €12.20 million ($13.06 million).

Street expects TRVG’s EPS for the quarter ending December 31, 2023, to increase 9.4% year-over-year to $0.04. Its revenue for the quarter ending March 31, 2024, is expected to increase 4.9% year-over-year to $128.24 million. Over the past month, the stock has declined 4.7% to close the last trading session at $1.13.

TRVG’s POWR Ratings reflect its solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system.

It has an A grade for Quality and a B for Value and Momentum. It is ranked #6 in the Internet industry. To see the other ratings of TRVG (Growth, Stability, and Sentiment), click here.

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LZ shares were trading at $10.28 per share on Monday afternoon, up $0.19 (+1.88%). Year-to-date, LZ has gained 32.82%, versus a 18.12% rise in the benchmark S&P 500 index during the same period.

About the Author: Abhishek Bhuyan

Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments. More...

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