The internet has seamlessly integrated into our lives, becoming an indispensable part of our existence. Its ever-expanding reach and impact have created an insatiable demand for reliable, cutting-edge internet services.

As internet penetration increases, smartphone adoption soars, and technology advances, the trajectory for this sector is set for unprecedented growth and innovation. Given this backdrop, in this piece, I evaluated two internet stocks, Snap Inc. (SNAP) and Despegar.com, Corp. (DESP), to determine which could be a better buy for investors.

SNAP is a prominent camera company offering an application known as Snapchat that connects people globally through short videos and images. In contrast, DESP is an Argentina-based online travel company that provides a broad suite of travel products through its two segments: Air; and Packages, Hotels, and Other Travel Products.

The is no denying that the frenzy around Artificial Intelligence (AI) has taken the internet by storm. It’s a thrilling era where AI’s creative prowess captivates imaginations, pushing the boundaries of what’s possible and shaping a future of endless possibilities.

Given AI’s promising growth prospects, companies from across the business spectrum have jumped on the bandwagon, debuting generative AI-powered chatbots, AI assistants, and AI services, which are poised to transform our lives and work. According to analysts at PwC, AI could add up to $15.7 trillion to global GDP in 2030, which is more than the current output from India and China combined.

Simultaneously, the global internet user base achieved an astonishing milestone, with over 5.16 billion individuals accounting for approximately 64.4% of the world’s population. Additionally, an impressive 4.76 billion individuals actively engage with social media platforms worldwide. These numbers highlight the widespread adoption and influence of the internet and social media in our modern world.

Furthermore, the global market for internet services is anticipated to increase at a CAGR of 4.2%, reaching a value of $651.74 billion by 2029. Internet companies DESP and SNAP will likely benefit from the hype surrounding AI.

SNAP has gained 46.5% year-to-date to close the last trading session at $12.93, while DESP returned 35.1%, closing the last trading session at $6.96. However, DESP is a clear winner in the three-month price performance, with 21.2% returns compared to SNAP’s 19.4% returns.

But which stock is a better buy now? Let’s find out.

Latest Developments

Despite a challenging demand environment marked by steep inflation and substantially higher airfares, DESP held fast with a Take Rate of 13.8%, supported by the continuing recovery in Latin American travel demand, particularly with regard to international traffic.

Considering the company’s performance, CEO Damian Scokin expects to deliver consolidated revenues in the range of $640 to $700 million and adjusted EBITDA between $80 and $100 million for the fiscal year 2023.

On March 23, SNAP unveiled a new enterprise solution, AR Enterprise Services (ARES), allowing businesses to seamlessly integrate Snap’s Augmented Reality (AR) into their channels. This offering enhances consumer experiences, providing personalized interactions and advanced tools to boost purchase confidence.

The latest innovation expands the company’s business offerings and strengthens its position in the AR market.

Recent Financial Results

DESP’s gross bookings increased 44% year-over-year to $1.15 billion in the first quarter that ended March 31, 2023. Its total revenue was $158.71 million, up 41% from the same period in 2022, while its gross profit grew 54.1% year-over-year to $107.68 million.

The company’s operating income amounted to $7.26 million versus an operating loss of $4.80 million in the year-ago period. Furthermore, DESP’s adjusted EBITDA came in at $17.27 million, reflecting an improvement of 154.5% year-over-year.

SNAP’s revenue for the first quarter that ended March 31, 2023, decreased 6.9% year-over-year to $988.61 million, while its operating loss widened 34.5% from the year-ago value to $365.26 million.

During the same period, the company’s adjusted EBITDA declined by 98.7% from the prior-year quarter to $813 thousand. In addition, its net loss and net loss per share attributable to common stockholders came in at $328.67 million and $0.21, respectively.

Expected Financial Performance

Analysts expect DESP’s revenue to increase by 18.2% in the fiscal second quarter (ended June 30, 2023), 24.3% in the current year, and 12.7% in the following year, on a year-over-year basis. Similarly, the company’s EPS is expected to grow 125% in the to-be-reported quarter, 115% in the current year, and 117.8% next year.

Analysts expect the SNAP’s revenue to decrease by 4.6% for the second quarter (ended June 30, 2023) and 1.3% in the fiscal year 2023. The company’s EPS is expected to decline by 112.6% in the about-to-be-reported quarter and 58.4% in the current year.

Profitability

SNAP’s trailing-12-month revenue is 7.81 times what DESP generates. Moreover, DESP is more profitable, with an EBIT margin and EBITDA margin of 1.86% and 8.07% compared to SNAP’s negative 28.71% and 24.31%, respectively. Also, DESP’s gross profit margin of 67.25% compares to SNAP’s 59.94%. In addition, DESP’s ROTC of 6.15% compares with SNAP’s negative 11.19%.

Valuation

In terms of forward non-GAAP P/E, DESP is currently trading at 32.45x, 81.9% lower than SNAP, which is trading at 179.71x. Likewise, DESP’s forward Price/Sales ratio of 0.69 is 85.1% lower than SNAP’s 4.64.

Thus, DESP is relatively affordable.

POWR Ratings

DESP has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. Conversely, SNAP has an overall rating of D, translating to Sell. 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. DESP has a grade of B for Value, in sync with its lower-than-industry valuation. In terms of forward EV/Sales and EV/EBITDA, DESP is trading at 0.70x and 5.33x, 42.1% and 45.7% lower than the industry averages of 1.21x and 9.81x, respectively.

Conversely, SNAP has a grade of C for Value, consistent with its mixed valuation. SNAP’s forward EV/Sales multiple of 4.66 is 150.4% higher than the industry average of 1.86x. On the other hand, its forward Price/Book multiple of 8.33 is 47.4% lower than the five-year industry average of 15.85.

Also, DESP has a B grade for Growth, in sync with its solid financial performance in the last reported quarter. In contrast, SNAP has an F grade for Growth, consistent with its deteriorating financials.

Moreover, DESP is rated B for Sentiment in sync with the optimistic analyst expectations. In contrast, SNAP has a D grade for Sentiment, consistent with its pessimistic analyst estimates. The consensus EPS estimate of DESP for the fiscal second quarter (ended June 30, 2023) is $0.02, while analysts expect a loss per share of $0.04 for SNAP in the same period.

Of the 58 stocks in the Internet industry, DESP is ranked #4, while SNAP is ranked #52 in the same D-rated industry.

Beyond what we’ve stated above, we have also rated both stocks for Momentum, Stability, and Quality. Click here to view DESP ratings. Get all SNAP ratings here.

The Winner

Given AI’s widespread incorporation across various applications and industry verticals and the hype surrounding generative AI, the demand for groundbreaking internet services reaches a fever pitch. Therefore, leading internet companies DESP and SNAP are expected to benefit significantly from this backdrop.

However, SNAP’s relatively weak financials, lower profitability, and bleak growth prospects could make its competitor DESP 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.

What To Do Next?

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SNAP shares were trading at $12.84 per share on Friday afternoon, down $0.09 (-0.70%). Year-to-date, SNAP has gained 43.46%, versus a 19.60% rise in the benchmark S&P 500 index during the same period.

About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. More...

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