The global internet sector stands as one of the most vibrant and rapidly expanding segments of the world economy, offering considerable potential for substantial returns. Notably, stocks such as Etsy, Inc. (ETSY), Chegg, Inc. (CHGG), and Pinterest, Inc. (PINS) could be sound watchlist additions this month.
Before delving into the fundamentals of these stocks, let’s first examine the broader industry landscape.
The internet industry’s significance has never been more pronounced, given its integral role in everyday activities, driven by the widespread adoption of e-commerce, the Internet of Things (IoT), Artificial Intelligence (AI), and cloud computing.
In the post-COVID-19 era, the global mobile internet market is poised for significant expansion. Estimates indicate that it reached 5.60 billion subscribers in 2022, with projections suggesting it will soar to 9.10 billion subscribers by 2030, demonstrating a robust CAGR of 6.4% from 2022 to 2030.
According to GrandViewResearch, the digital transformation sweeping across various industries is propelling the prospects of broadband services, with the global broadband services market anticipated to grow at a CAGR of 9.7% between 2023 and 2030.
According to Statista, in 2023, the number of internet users worldwide stood at 5.18 billion, meaning that around two-thirds of the global population is connected to the World Wide Web.
The United States ranks as one of the largest online markets in the world. Home to some of the leading internet companies, over 90% of Americans have access to the internet.
Given these compelling statistics, let’s delve into the fundamentals of the aforementioned Internet stocks to gain a deeper understanding, beginning with the third stock.
Stock #3: Etsy, Inc. (ETSY)
ETSY operates dual-sided online marketplaces, facilitating connections between buyers and sellers. Its principal platform, Etsy.com, serves as a conduit linking artisans and entrepreneurs with diverse consumer bases.
ETSY’s trailing-12-month gross profit and EBIT margins of 70.64% and 14.09% are 99.5% and 93.6% higher than the industry averages of 35.41% and 7.28%, respectively. Its trailing-12-month levered FCF margin of 21.53% is 324% higher than the 5.08% industry average.
For the fiscal second quarter (ended June 30, 2023), ETSY’s revenue increased 7.5% year-over-year to $628.88 million. Its gross profit grew 6.4% from the year-ago value to $440.24 million. Also, the company’s adjusted EBITDA rose 2.2% from the prior year’s quarter to $166.24 million.
The company expects its revenue to come between $610 million and $645 million for the fiscal third quarter of 2023, while its adjusted EBITDA margin is projected to be between 27% and 28%.
For the fiscal fourth quarter ending December 2023, ETSY’s revenue is projected to increase 5.4% year-over-year to $850.58 million. Its EPS for the next quarter is estimated to come in at $1.38, up 20.6% from the prior year’s quarter. Additionally, the company topped the consensus revenue and EPS estimates in each of the trailing four quarters.
Shares of ETSY marginally declined intraday to close the last trading session at $64.56.
ETSY’s POWR Ratings reflect its solid prospects. The stock has an A grade for Quality. It is ranked #34 out of 59 stocks in the Internet industry. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Click here to see the other ratings of ETSY for Growth, Value, Momentum, Stability, and Sentiment.
Stock #2: Chegg, Inc. (CHGG)
CHGG operates a direct-to-student learning platform, offering subscription services such as Chegg Study and Chegg Writing, as well as skills-based courses, language learning, and textbook rentals/sales. Its comprehensive services support students from academics to career development.
On August 7, CHGG partnered with Scale AI to develop proprietary Large Language Models (LLMs) to enhance its personalized learning assistant, aiming to address barriers hindering student success.
This partnership would bring a simpler conversational interface and personalized content, potentially reducing dropout rates and improving outcomes for CHGG’s student users.
On April 17, CHGG announced CheggMate, an AI-enhanced learning service powered by OpenAI’s GPT-4, designed to provide personalized, real-time learning support, quizzes, and content recommendations to students, aiming to improve their learning experiences. This could bode well for the company.
In terms of trailing-12-month net income and levered FCF margins, CHGG’s 37.85% and 22.75% are 763.4% and 348% higher than the respective industry averages of 4.38% and 5.08%. Its trailing-12-month ROTA of 14.23% is 265.8% higher than the 3.89% industry average.
CHGG’s revenue amounted to $182.85 million for the fiscal second quarter ended on June 30, 2023, while gross profit came in at $135.44 million. Its net income came in at $24.61 million, improving 229.2% from year-ago value.
For the fiscal second quarter that ended on June 30, 2023, CHGG’s net income and net income per share came in at $24.61 million and $0.21, up 229.2% and 250% year-over-year, respectively. Its EBITDA grew 132.8% from the year-ago value to $71.89 million.
In addition, the company’s free cash flow rose 31.3% from the prior year’s period to $111.83 million.
Analysts expect CHGG’s revenue to grow 2.2% year-over-year to $723.93 million for the fiscal year ending December 2024. The company’s EPS for the next year is estimated to stand at $1.15, up 5.7% from the previous year. Furthermore, the company surpassed the consensus revenue estimates in all four trailing quarters.
The stock has declined 1% over the past month, closing the last trading session at $9.93.
CHGG’s prospects are reflected in its POWR Ratings. It has an A grade for Value and a B for Quality. It is ranked #27 out of 59 stocks in the same industry.
Click here to see the other ratings of CHGG for Growth, Momentum, Stability, and Sentiment.
Stock #1: Pinterest, Inc. (PINS)
PINS operates a visual discovery engine worldwide, helping users find ideas, products, and inspiration through pins and planning tools. The company also offers advertising options, including shoppable product pins, connecting users with retailers.
On September 5, PINS introduced a new body type technology that, combined with skin tone recognition, aims to boost representation in women’s fashion content by up to five times, positively impacting PINS’ commitment to inclusivity and user engagement.
This could attract a more diverse user base and advertisers interested in reaching a broader audience.
On August 21, PINS announced that it is rolling out new privacy features, including private profiles, enhanced follower control, and improved messaging options, aiming to provide a safer and more controlled environment for users, particularly teenagers. These updates reflect PINS’ commitment to user safety and may bolster user trust and engagement on the platform.
PINS’ trailing-12-month gross profit and levered FCF margins of 75.48% and 14.32% are 52.9% and 68.5% higher than the industry averages of 49.37% and 8.50%, respectively. Its trailing-12-month asset turnover ratio of 0.83x is 72.5% higher than the 0.48x industry average.
For the fiscal second quarter that ended June 30, 2023, PINS’ revenue increased 6.3% to $708.03 million. Its adjusted EBITDA grew 16.3% from year-ago value to $107.02 million.
Moreover, the company’s non-GAAP net income and non-GAAP net income per share came in at $143.09 million and $0.21, up 83.7% and 90.9% year-over-year, respectively.
The consensus revenue estimate of $3.03 billion for the fiscal year ending December 2023 indicates an 8% year-over-year improvement. Likewise, the consensus EPS estimate of $0.94 for the current year exhibits a 52.1% rise from the previous year. Also, the company surpassed the consensus EPS estimates in all four trailing quarters.
PINS’ shares have gained 11% over the past six months, closing the last trading session at $26.30.
PINS’ fundamentals are reflected in its POWR Ratings. It has an A grade for Quality.
Within the same industry, it is ranked #25. Click here to view PINS’ ratings for Growth, Value, Momentum, Stability, and Sentiment.
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PINS shares were trading at $26.01 per share on Thursday afternoon, down $0.29 (-1.10%). Year-to-date, PINS has gained 7.13%, versus a 18.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...
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