Gloomy Near-Term Outlook for Internet Delivery Services

The Zacks Internet – Delivery Services industry primarily comprises companies that offer services via Internet-based platforms. These include food delivery, online travel booking, direct marketing and media services, plus web hosting among others.

Being growth-stage companies, industry participants are spending more on R&D and sales & marketing, thereby making it difficult to generate profits in the near term.

Let’s take a look at the industry’s four major themes:

  • Internet is ubiquitous and the increasing usage of smartphones is changing the delivery landscape.  The companies in this industry are benefiting from the growing number of Internet users, coupled with improvement in Internet penetration and the rapid adoption of 4G Volte technology. The emergence of 5G technology, which promises faster speed and deliverability, bodes well for this industry.
     
  • Shift in consumer preferences, driven by convenience and easy accessibility, is anticipated to aid the industry. Notably, the robust transition from offline to online food ordering, and the rising penetration of online travel booking augurs well for the industry players. However, as higher consumer spending appetite is the main driver of the overall industry’s health, any sluggishness in the global economy will pose a risk.
     
  • Online delivery is yet to expand beyond the major metros, reflecting lower penetration and significant room for growth. However, as expansion into the new markets will take some time to generate volumes, higher upfront costs are likely to hurt profitability. Moreover, Amazon’s (AMZN) focus on strengthening its delivery system poses a key challenge to the industry players. We believe the company’s powerful distribution channels are a major force that might massively threaten the incumbents in this industry. Also, search giant Alphabet (GOOGL) forayed into the food delivery market, with its delivery arm Wing and an array of food delivery apps, which are likely to further intensify competition.
     
  • The industry’s near-term prospects look gloomy due to the coronavirus-induced global lockdown. There is travel ban in most countries, which is hurting online travel and hotel booking companies. Moreover, online food delivery companies have been hit as restaurant suppliers have been ordered to shut their operations. Also, as people are staying indoors, they now have more time to cook, which results in lesser requirement for outside food. Nonetheless, online travel and hotel booking as well as online food delivery companies are poised to bounce back once normalcy resumes.

Zacks Industry Rank Indicates Bleak Prospects

The Internet – Delivery Services industry is housed within the broader Computer and Technology sector. It carries a Zacks Industry Rank #234, which places it in the bottom 7% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning within the bottom 50% of the Zacks-ranked industries is the result of a bearish earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have been revised 35.5% downward.

Before we present a few Internet – Delivery Services stocks that one can hold on to, let’s take a look at the industry’s recent stock-market performance and the valuation picture.

Industry Outperforms the S&P 500

The Internet — Delivery Services industry has outperformed the S&P 500 composite but lagged the broader sector in the past year.

The industry has appreciated 32.8% in this period compared with the S&P 500 composite and the broader sector’s increase of 20.2% and 44.2%, respectively.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-sales (P/S), a commonly used multiple for valuing the Internet delivery stocks, the industry is currently trading at 1.13X compared with the S&P 500’s 3.84X and the sector’s 4.32X.

Over the past five years, the industry has traded as high as 1.33X, as low as 0.77X and recorded a median of 1X as the charts below show.

Price-to-Sales Ratio (Past 5 Years)

 

Bottom Line

Higher Internet presence in the emerging markets, a burgeoning affluent middle class, and the accelerated uptake of smartphones will help participants in the Internet – Delivery Services industry.

However, steep marketing expenses due to planned expansion into new delivery markets will be a persistent overhang on the margins in the near term. Also, the coronavirus-induced global lockdown is likely to hurt Internet delivery companies in the days to come.

However, we are presenting four stocks with a Zacks Rank #3 (Hold) that investors may currently hold on to.

Price and Consensus: QNST

Price and Consensus: GRUB

Price and Consensus: ASUR

Price and Consensus: GDDY

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QuinStreet, Inc. (QNST) : Free Stock Analysis Report
 
Grubhub Inc. (GRUB) : Free Stock Analysis Report
 
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
 
GoDaddy Inc. (GDDY) : Free Stock Analysis Report
 
Asure Software Inc (ASUR) : Free Stock Analysis Report
 
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
 
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QuinStreet, Inc. (QNST) : Free Stock Analysis Report
 
Grubhub Inc. (GRUB) : Free Stock Analysis Report
 
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
 
GoDaddy Inc. (GDDY) : Free Stock Analysis Report
 
Asure Software Inc (ASUR) : Free Stock Analysis Report
 
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
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