Easing of travel restrictions and social distancing measures caused by the pandemic are benefiting the Zacks Internet – Delivery services industry. In addition, recovery is expected for companies like GoDaddy (GDDY – free report) , VIPshop Holdings (VIPS – free report) MakeMyTrip (MMYT – free report) and Asure software (ASUR – Free Report), showing business activity reaching pre-pandemic levels following the reopening of economies. In addition, a greater Internet presence in emerging markets, a fast-growing affluent middle class, and the accelerated adoption of smartphones will help Internet delivery participants.
Online delivery has yet to expand beyond the major metropolitan areas, underlining the lower penetration rate and significant room for growth. Nevertheless, as expansion into newer markets will take some time to generate volumes, higher initial costs could affect profitability. These, along with higher operating costs related to hiring new employees and sales and marketing strategies to capture more market share, are likely to squeeze margins in the near term.
The Zacks Internet – Delivery Services industry is primarily made up of companies that provide services through Internet-based platforms. These include food delivery, online travel booking, direct marketing and media services, plus web hosting. Some companies in this space offer internet domain registration and web hosting registration as well as e-business related software and services. A few industry participants offer flight and train ticket bookings, tailor-made holiday packages, hotel bookings, bus tickets and car rental services. Some players provide online direct marketing and media services, including online messaging, email broadcasting, search engine marketing and brand management facilities. Companies in the growth phase of the industry spend more on R&D and sales & marketing, making it difficult for them to make a profit in the short term.
3 trends shaping the future of the internet delivery services industry
Key Catalysts for Smartphone and Internet Penetration: The Internet is ubiquitous and the increasing use of smartphones is changing the delivery landscape. The companies in the Zacks Internet – Delivery Services industry are benefiting from the growing number of Internet users, coupled with an improvement in Internet penetration and rapid adoption of the 4G Volte technology. The emergence of 5G technology, which promises greater speed and deliverability, also bodes well for this industry.
Shifting consumer preferences: The shift in consumer preference, driven by convenience and easy accessibility, is expected to help the industry. In particular, the accelerated transition from offline to online food ordering and the increasing penetration of online travel booking bodes well for players in the industry. Nevertheless, as a higher consumer willingness to spend is the main driver of the overall health of the industry, any sluggishness in the global economy poses a risk.
Higher initial costs to hurt profitability: Online delivery has yet to expand beyond the major metropolitan areas, underlining the lower penetration rate and significant room for growth. Nevertheless, as expansion into the newer markets will take some time to generate volumes, higher initial costs could affect profitability. In addition, Amazon’s focus on strengthening its delivery system is a significant challenge for industry players. We believe that the company’s powerful distribution channels pose a major threat to the incumbents in this industry. Also, search giant Alphabet has made a foray into the food delivery market, with its delivery arm, Wing, and a range of food delivery apps likely to further intensify competition.
Zacks Industry Rank indicates clear outlook
The Internet – Delivery Services industry is housed in the broader Computer and technology sector. It has a Zacks Industry Rank #16, placing it in the top 6% of over 250 Zacks industries.
From the group Zacks Business Ranking, which is actually the average of the Zacks Rank of all member stocks, indicates solid near-term prospects. Our research shows that the top 50% of industries ranked on Zacks outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of industries ranked by Zacks is a result of positive earnings prospects for its constituent companies in aggregate. Before we present a few stocks that you might want to consider for your portfolio given the bright outlook, let’s take a look at the recent stock market performance and valuation picture of the sector.
Industry outperforms sector and S&P 500
The Zacks Internet – Delivery industry has outperformed the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year.
The industry is up 6.3% over the period, while the S&P 500 and the broader industry are down 21.2% and 37.6% respectively.
One-year price performance
Current industry valuation
Based on 12-month price-to-sale (P/S), a commonly used multiple for valuing Internet delivery stocks, the industry is currently trading at 0.88x compared to the 3.30x of the S&P 500 and the 2.85 of the sector. X.
Over the past five years, the industry has traded up to 1.29x, down to 0.57x and a median of 0.90x, as the charts below show.
Price/Sales Ratio (Industry vs. S&P 500)
Price-Sales Ratio (Industry vs. Sector)
4 stocks to watch
Asure software: It is a cloud computing company that offers enterprise customers the chance to modernize everything from human capital management (HCM) and time tracking solutions to payroll and taxation. The stock currently has a Zacks Rank #1 (Strong Buy).
Asure Software’s strategic initiative to become a pure software-as-a-service HCM company is contributing to revenue growth. The company’s focus on driving innovation for its HCM solutions helps it expand its footprint in the HCM market.
New customer additions and continued focus on cross-selling to existing customers are driving Asure Software’s revenues. The company’s differentiated employee strategy, measurement capabilities and extensive product offerings help the company win new customers.
Zacks’ consensus estimate for Asure Software’s 2023 earnings has been revised upward by 6 cents to 28 cents per share in the last 60 days.
Price and Consensus: ASUR
MakeMyTrip: It is an online travel services company that offers travel products and solutions in India and the United States. The company’s services and products include airline tickets, tailor-made holiday packages, hotel bookings, train tickets, bus tickets and car rentals. It also facilitates access to travel insurance.
MakeMyTrip is benefiting substantially from improved travel conditions and reopening economies. In addition, the recovering demand for hotels, due to the increase in short holiday breaks, great travel deals and hygienically safe accommodations, is a major positive. Also, this Zacks Rank #2 (Buy) company is optimistic about its cost containment initiatives, MySafety and GoSafe programs, and its strengthening hotel business.
Zacks’ consensus estimate for fiscal year 2023 earnings has been revised upward by one cent to 25 cents per share in 30 days.
Price and Consensus: MMYT
GoDaddy thrives on the growing adoption of its domain products. Higher subscriptions to Websites + Marketing and managed WordPress offerings, international expansion, robust feature engagements, and strength in GoCentral are tailwinds for the company’s Hosting and Presence business.
In addition, the acquisition of the payment processing company Poynt has strengthened GoDaddy’s merchant offering and given it an edge over its competitor, Shopify. In addition, last year’s acquisition of Neustar’s Registry business has made the company one of the largest players in the Internet infrastructure industry.
Zacks’ consensus estimate for 2023 earnings has been revised upward by 3 cents over the past seven days to $2.81 per share.
Price and Consensus: GDDY
VIPshop holdings: It is an online discount store for brands. The company offers branded products to consumers in China through flash sales on its website vipshop.com. Vipshop currently has a Zacks Rank #3.
The company’s continued efforts to strengthen product offerings and improve product sourcing are contributing to its financial performance as online shopping spreads during the pandemic. Furthermore, the solid execution of its merchandising strategy strengthens its active customer base.
In addition, the successful transition to discount stores is a major positive point. This is likely to continue to drive momentum in repeat customers and help attract new customers.
In addition, the company’s quarterly results are likely to continue to benefit from its increasing focus on high-margin apparel-related businesses, particularly the discount apparel business. In addition, Vipshop’s major discount channels are expected to bolster online gross trading volumes in the coming quarters.
Zacks’ consensus estimate for current year earnings has moved south 17 cents over the past 60 days to $1.17 per share.
Price and Consensus: VIPS