The Internet industry is well-positioned for long-term growth due to individuals and businesses’ increased adoption of digital services in the post-pandemic era. Internet companies are diversifying their offerings to meet the rising demand for digital solutions for businesses and consumers.
Before diving deeper into these stocks, let’s discuss why SHOP must be avoided and why the internet industry is well-positioned for growth.
At the beginning of the third quarter in 2023, approximately 5.19 billion people worldwide accessed the internet, constituting 64.4% of the global population. Furthermore, global 5G connections are expected to surpass 1.90 billion by the end of this year, with projections indicating approximately 6.80 billion 5G connections by the end of 2027.
Moreover, government efforts such as the Broadband Equity, Access, and Development Program, which received $42.54 billion in funding through President Biden’s Bipartisan Infrastructure law, aim to ensure universal Internet access. This program seeks to achieve this goal by supporting nationwide initiatives for planning, infrastructure expansion, and adoption of high-speed internet services.
SHOP reported higher-than-expected earnings and revenue in the second quarter. Its EPS came 181.1% higher than analyst estimates, while its revenue beat the consensus estimate by 4.3%. For the second quarter ended June 30, 2023, SHOP’s revenues rose 30.8% year-over-year to $1.69 billion. Its adjusted gross profit increased 26.9% year-over-year to $844 million.
In addition, its adjusted net income came in at $178 million, compared to an adjusted loss of $39 million in the year-ago period. Also, its adjusted EPS came in at $0.14, compared to an adjusted loss per share of $0.03 in the prior-year quarter. Also, its GMV increased 17% year-over-year to $55 billion.
The company delivered strong results due to new signups and price increases across its services, which it undertook this year. Moreover, the company recently sold its delivery and logistics business to Flexport and laid off 20% of its workforce to help reduce costs.
For the third quarter, the company has forecasted its revenue to grow at a low-twenties percentage rate on a year-over-year basis. SHOP expects a gross margin percentage to be two or three percentage points higher than the second quarter gross margin of 49.3%. Its capital expenditures for the year are expected to be $45 million.
SHOP trades at an expensive valuation. SHOP’s forward non-GAAP P/E of 104.57x is 377.9% higher than the industry average of 21.88x. Its forward EV/EBIT of 117.36x is 561.1% higher than the industry average of 17.75x. Additionally, its 9.40x forward EV/Sales is 258.6% higher than the 2.62x industry average.
SHOP’s stock has declined 15% in price over the past three months to close its last trading session at $53.70. Despite the strong momentum around SHOP, the company faces stiff competition from its peers. Moreover, the uncertain macroeconomic outlook may dampen its prospects.
Considering the uncertainty around SHOP’s prospects, investors could look at SFIX, SSTK, and UPWK as they are outperforming SHOP. Now let’s examine the fundamentals of the three above-mentioned Internet – Services stocks, beginning with the third choice.
Stock #3: Stitch Fix, Inc. (SFIX)
SFIX sells a range of apparel, shoes, and accessories for men, women, and kids through its website and mobile application in the United States and the United Kingdom. It offers denim, dresses, blouses, skirts, shoes, jewelry, and handbags under the Stitch Fix brand.
SFIX’s revenue grew at a CAGR of 6% over the past five years. Moreover, its levered FCF grew at a CAGR of 43.6% over the past three years.
In terms of forward EV/Sales, SFIX’s 0.19x is 83% lower than the 1.13x industry average. Its 0.27x forward Price/Sales is 67.9% lower than the 0.84x industry average. However, its 14.80x forward EV/EBITDA is 60.3% higher than the 9.23x industry average.
SFIX’s net sales for the fourth quarter ended July 29, 2023, came in at $375.80 million. Its gross profit for the period came in at $162.74 million. The company’s adjusted EBITDA came in at $10.36 million, compared to an adjusted EBITDA loss of $31.78 million in the year-ago quarter.
In addition, loss per share attributable to common stockholders narrowed 73% year-over-year to $0.24.
Analysts expect SFIX’s fiscal 2025 revenue to increase 4.9% year-over-year to $1.41 billion. While its EPS for the quarter ending October 31, 2023, is expected to remain negative. Over the nine months, the stock has gained 6.8% to close the last trading session at $3.13.
SFIX’s POWR Ratings are consistent with its fundamentals. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
Stock #2: Shutterstock, Inc. (SSTK)
SSTK provides quality content and creative workflow solutions internationally. It offers image services consisting of photographs, vectors, and illustrations used in visual communications. The company provides its services under the Shutterstock, Bigstock, Offset, TurboSquid, and PremiumBeat brands names.
On July 11, 2023, SSTK announced an expanded six-year partnership with OpenAI, solidifying its position as a leading provider of high-quality training data. This grants OpenAI access to SSTK’s media libraries while providing SSTK with priority access to OpenAI’s technology, enabling generative AI on mobile through GIPHY and fostering AI innovation through industry partnerships.
Paul Hennessy, CEO at SSTK, said, “The renewal and significant expansion of our strategic partnership with OpenAI reinforces Shutterstock’s commitment to driving AI tech innovation and positions us as the data and distribution partner of choice for industry leaders in generative AI.”
On May 23, 2023, SSTK announced its definitive agreement to acquire GIPHY, Inc. from Meta Platforms, Inc., expanding its content offerings to include the world’s largest collection of GIFs and stickers for casual conversational content. The transaction involves $53 million in cash and is set to close in June 2023.
Paul Hennessy, CEO at SSTK, predicts that the GIPHY acquisition will expand the company’s reach into casual conversations, allowing everyday users to express themselves with GIF and sticker content. SSTK plans to leverage its capabilities to monetize and offer the GIF library to customers.
SSTK’s revenue grew at a CAGR of 9.4% over the past three years. Its EBITDA grew at a CAGR of 43.1% over the past three years. Moreover, its EBIT grew at a CAGR of 44.2% over the past three years.
In terms of forward EV/Sales, SSTK’s 1.58x is 12.7% lower than the 1.81x industry average. Its 0.50x forward non-GAAP PEG is 66.6% lower than the 1.51x industry average. However, its 8.66x forward non-GAAP P/E is 34.1% lower than the 13.13x industry average.
In terms of the trailing-12-month net income margin, SSTK’s 13.35% is 223.4% higher than the 4.13% industry average. Likewise, its 23.81% trailing-12-month Return on Common Equity is 477.8% higher than the 4.12% industry average. Additionally, its 13.99% trailing-12-month Return on Total Capital is 300.7% higher than the 3.49% industry average.
SSTK’s revenue for the second quarter ended June 30, 2023, increased 1% year-over-year to $208.84 million. Its adjusted net income increased 29% year-over-year to $39.06 million. The company’s adjusted net income per share increased 28.9% year-over-year to $1.07. Also, its adjusted EBITDA rose 22.7% year-over-year to $60.06 million.
Street expects SSTK’s revenue for the quarter ending September 30, 2023, to increase 5.1% year-over-year to $214.60 million. Its EPS for the same quarter is expected to decline 6% year-over-year to $0.94. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past month, the stock has declined 8.4% to close the last trading session at $38.18.
SSTK’s prospects are reflected in its POWR Ratings. It has an A grade for Value and a B for Quality. It is ranked #9 in the same industry. To see SSTK’s Growth, Value, Sentiment, and Quality ratings, click here.
Stock #1: Upwork Inc. (UPWK)
UPWK operates a global work marketplace connecting businesses with freelancers and agencies. The marketplace offers a wide range of talent across various categories, streamlining workflows and simplifying talent sourcing, outreach, and contracting.
On July 31, 2023, UPWK and OpenAI announced OpenAI Experts on Upwork, a program that offers direct access to skilled independent professionals experienced in working with OpenAI technologies. This partnership connects OpenAI customers and businesses with experts proficient in utilizing the OpenAI API platform and various AI skills available on Upwork, including GPT-4, Whisper, and AI model integration.
Dave Bottoms, general manager and VP of product at UPWK, said, “We are thrilled to offer talented professionals on Upwork even more impactful opportunities and look forward to connecting OpenAI customers with highly skilled talent through OpenAI Experts on Upwork. Through strategic partnerships like this one, we aim to make Upwork the preeminent destination for AI-related talent and work.”
On July 11, 2023, UPWK announced a major expansion of AI offerings, introducing the AI Services hub to connect businesses with skilled AI professionals worldwide. They’ve also partnered with Jasper for generative AI tools, offering Upwork talent a 30-day free trial, enhancing productivity and work quality.
In addition, UPWK announced multiple generative AI-enhanced beta features, including an AI-powered job post generator, an enhanced chat experience, proposal tips, and additional AI resources for customers.
UPWK’s revenue grew at a CAGR of 25.5% over the past three years. Its tang book value grew at a CAGR of 8% over the past three years. Moreover, its total assets grew at a CAGR of 23.9% over the past three years.
UPWK’s total revenue for the second quarter ended June 30, 2023, increased 7.5% year-over-year to $168.61 million. Its non-GAAP gross profit increased 10.2% year-over-year to $128.22 million. The company’s non-GAAP income from operations came in at $12.51 million, compared to a non-GAAP loss from operations of $3.88 million in the year-ago quarter.
In addition, its non-GAAP net income came in at $13.52 million, compared to a non-GAAP net loss of $4.65 million in the prior year quarter. Also, its non-GAAP net income per share came in at $0.10, compared to a non-GAAP net loss per share of $0.04 in the year ago quarter.
For the quarter ending September 30, 2023, analysts expect UPWK’s revenue to increase 6.1% year-over-year to $168.24 million. Its EPS for the quarter ending December 31, 2023, is expected to increase 316.7% year-over-year to $0.17.
It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past three months, the stock has gained 27.7% to close the last trading session at $11.63.
It’s no surprise that UPWK has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has a B grade for Growth. Within the Internet – Services industry, it is ranked #4. In total, we rate UPWK on eight different levels. Beyond what we stated above, we have also given UPWK grades for Value, Momentum, Stability, Sentiment, and Quality. Get all the UPWK ratings here.
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UPWK shares were trading at $11.61 per share on Friday afternoon, down $0.02 (-0.17%). Year-to-date, UPWK has gained 11.21%, versus a 14.15% 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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