The Internet Services industry is a diverse sector that relies on massive software and hardware infrastructure to deliver various services to consumers. The pandemic has accelerated the digitization of different aspects of daily life, which has altered the course of the industry. This article will discuss the factors shaping the industry, the Zacks Industry Rank, the industry’s current valuation, and two solid picks for investors.
About the Industry
The Internet Services industry is home to a wide range of companies that offer different services. These companies operate with two primary models: an ad-based model where the service is offered free, and an ad-free model where they charge for the service. Large players in the industry include Alphabet, Baidu, and Akamai, while emerging players include Dropbox, Etsy, Shopify, Uber, Lyft, and Trivago.
Factors Shaping the Industry
Several factors shape the Internet Services industry. Firstly, the increased digitization of different aspects of daily life is a significant driver of the industry. The pandemic has accelerated the shift towards online services, and people are unlikely to give up these conveniences. The expansion of the installed base of connected devices beyond PCs and smartphones to IoT, automotive, and more is creating additional opportunities for targeting.
Secondly, the industry is capital-intensive, with high fixed costs of operation and a constant need to expand capacity. Therefore, a high interest rate and the impending recession can negatively affect the industry. Although the industry tends to do better when the overall economy does well, the still-elevated inflation is weighing on stocks.
Lastly, as these companies have grown over time, some of them have collected a wealth of information on their users, which has helped them build artificial intelligence (AI) to generate revenues from new technologies and services while lowering the cost of operation.
Zacks Industry Rank Indicates Slow Recovery
The Zacks Internet Services industry carries a Zacks Industry Rank #95, which places it among the top 38% of more than 250 Zacks-classified industries. The industry’s earnings estimate for 2023 is down 19.3% from May 2022, and the average earnings estimate for 2024 is down 21.1%.
Historically, the top 50% of Zacks-ranked industries outperforms the bottom 50%, so the industry’s positioning in the top 50% of the Zacks-ranked industries should be considered a positive.
Industry Lags on Stock Market Performance
On the basis of forward 12-month price-to-earnings (P/E) ratio, the industry is currently trading at a 20.33X multiple, which is its median value over the past year. However, this is a premium to the S&P 500’s 18.27X, although a discount to the sector’s 22.78X, suggesting that valuation has become more attractive in the past few months.
While initially trading in line with the broader Technology sector and the S&P 500, the industry has been trading at a discount to both since November. The industry has lost 4.1% of its value over this period compared to the S&P 500 index’s gain of 2.7% and the broader sector’s gain of 3.3%.