The internet industry is expected to keep thriving, thanks to growing digitization, expansion in smart infrastructure, and government initiatives.

However, while I think quality internet stock Travelzoo (TZOO) might be a solid buy now, LegalZoom.com, Inc. (LZ) might be best kept on hold, and Snap Inc. (SNAP) might be best avoided, given its weak fundamentals.

The National Telecommunications and Information Administration (NTIA) has authorized $930.02 million to build middle-mile high-speed Internet infrastructure throughout 35 states and Puerto Rico. This effort is part of President Biden’s Investing in America plan to increase data capacity and resiliency while connecting unserved regions to the Internet backbone.

The global internet service market is expected to grow at a CAGR of 4.4% until 2029. Government initiatives are fueling market expansion for wireless internet services, while technology suppliers and specialists are offering innovative solutions for urban infrastructure development in a variety of locales.

Investors’ interest in internet stocks is evident from SPDR S&P Internet ETF (XWEB) 22.3% returns over the past three months.

However, the internet industry faces obstacles such as the quick rate of technological improvements, rising competition among enterprises, and the need to constantly adapt to changing consumer demands. Furthermore, issues such as cybersecurity threats and privacy concerns represent significant challenges for internet-based businesses.

Let us look deeper into the fundamentals of the featured stocks.

Stock to Buy:

Travelzoo (TZOO)

TZOO is a global internet media company that offers travel, entertainment, and lifestyle experiences. The company’s segments include Travelzoo North America; Travelzoo Europe; and Jack’s Flight Club.

TZOO’s forward EV/EBIT of 7.49x is 52.9% lower than the industry average of 15.89x. Its forward EV/EBITDA of 5.70x is 32.7% lower than the industry average of 8.46x.

Its trailing-12-month ROCE of 236.98% is significantly higher than the 3.29% industry average, while its trailing-12-month ROTC of 34.05% is 781.2% higher than the industry average of 3.86%.

In the fiscal first quarter that ended March 31, 2023, TZOO’s revenues increased 17.1% year-over-year to $21.60 million. The company’s non-GAAP operating income increased 105.4% from the year-ago quarter to $5.54 million.

Also, net income attributable to TZOO increased 55.7% year-over-year to $3.67 million, while its EPS increased 21.1% from the prior-year quarter to $0.23.

Analysts expect TZOO’s revenue to increase 19.4% year-over-year to $84.32 million for the year ending December 2023. Its EPS is expected to grow 55.7% year-over-year to $0.87 for the same period. The stock has gained 66.7% over the past nine months to close the last trading session at $8.

TZOO’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

CARG has an A grade for Sentiment and Quality and a B for Growth and Momentum. Within the Internet industry, it is ranked first among the 58 stocks. Click here for the additional POWR Ratings for Value, and Stability for TZOO.

Stock to Hold:

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.

LZ’s trailing-12-month gross profit margin of 65.85% is 119.8% higher than the 29.96% industry average, while its trailing-12-month EBITDA margin of negative 1.18% compare to the industry averages of 13.61%.

LZ’s revenue for the fiscal first quarter ended March 31, 2023, increased 6.8% year-over-year to $165.94 million. Its non-GAAP net income came in at $14 million, compared to a non-GAAP net loss of $5.43 million in the year-ago quarter. Also, its non-GAAP net EPS came in at $0.07, compared to a non-GAAP net loss per share of $0.03 over the prior-year quarter.

However, its total current liabilities came in at $261.06 million for the period that ended March 31, 2023, compared to $249.02 billion for the period that ended December 31, 2022. Its total liabilities came in at $274.34 million, compared to $263.02 million for the same period.

LZ’s revenue is expected to increase 3.9% year-over-year to $644.03 million for the year ending December 2023, while its EPS is expected to grow 127.9% year-over-year to $0.36 in the same quarter.

The stock has gained 77.1% over the past six months to close the last trading session at $14.70.

LZ’s has an overall C rating, equating to a Neutral in our POWR Ratings system.

It also has a C grade for Stability, Sentiment, and Momentum. It is ranked #13 in the same industry. Beyond what is stated above, we’ve also rated LZ for Growth, Value and Quality. Get all LZ ratings here.

Stock to Sell:

Snap Inc. (SNAP)

SNAP operates as a technology company in North America, Europe, and internationally. The company offers Snapchat, a visual messaging application with various tabs, such as camera, visual messaging, snap map, stories, and spotlight, that enable people to communicate visually through short videos and images.

SNAP’s forward EV/Sales of 4.44x is 145.7% higher than the industry average of 1.81x. Its forward EV/EBITDA multiple of 198.41 is significantly higher than the industry average of 8.46.

Its trailing-12-month CAPEX/Sales of 3.44% is 14.4% lower than the 4.02% industry average.

SNAP’s revenue for the second quarter that ended June 30, 2023, decreased 3.9% year-over-year to $1.07 billion, while its operating loss increased marginally from the year-ago value to $404.34 million.

During the same period, the company’s adjusted EBITDA loss came in at $38.48 million compared to adjusted EBITDA of $7.19 million. In addition, its net loss and net loss per share attributable to common stockholders came in at $377.31 million and $0.02, respectively.

Street expects SNAP’s revenue to decrease 2.2% year-over-year to $4.50 billion for the year ending December 2023. Its EPS is expected to come in at negative $0.01 for the same period. SNAP’s shares have lost 4.3% over the past month to close the last trading session at $10.73.

SNAP has an overall D rating, equating to a Sell in our POWR Ratings system.

It also has a D grade for Growth, Stability, and Sentiment. It is ranked #53 in the same industry. To see additional SNAP ratings for Value, Momentum, and Quality, click here.

What To Do Next?

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TZOO shares were trading at $7.16 per share on Thursday afternoon, down $0.84 (-10.50%). Year-to-date, TZOO has gained 60.90%, versus a 20.65% rise in the benchmark S&P 500 index during the same period.

About the Author: Rashmi Kumari

Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions. More...

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