Whether it be online shopping or social media, secular forces are propelling consumer internet businesses forward. But it’s not all sunshine and rainbows as consumer purchasing power can make or break demand. Unfortunately, the market seems to believe stormy skies are ahead as the industry has shed 17.4% over the past six months. This performance is a stark contrast from the S&P 500’s 11% gain.
Despite the lackluster result, a few diamonds in the rough can produce earnings growth no matter what, and we started StockStory to help you find them. On that note, here are two internet stocks boasting durable advantages and one we’re steering clear of.
One Consumer Internet Stock to Sell:
ACV Auctions (ACVA)
Market Cap: $1.01 billion
Founded in 2014, ACV Auctions (NYSE: ACVA) is an online auction marketplace for car dealers and wholesalers to buy and sell used cars.
Why Are We Wary of ACVA?
- Gross margin of 27.3% reflects its high servicing costs
- Excessive marketing spend signals little organic demand and traction for its platform
ACV Auctions’s stock price of $5.70 implies a valuation ratio of 11.7x forward EV/EBITDA. Read our free research report to see why you should think twice about including ACVA in your portfolio.
Two Consumer Internet Stocks to Buy:
Alphabet (GOOGL)
Market Cap: $4.33 trillion
Started by Stanford students Larry Page and Sergey Brin in a Menlo Park garage, Alphabet (NASDAQ: GOOGL) is the parent company of the eponymous Google Search engine, Google Cloud Platform, and YouTube.
Why Will GOOGL Outperform?
- Alphabet’s dominant Google Search sits on the pantheon of the best businesses ever. This is reflected in its robust long-term revenue growth and elite operating margin.
- The company’s profit margins have become even higher over time, speaking to its scale advantages and operating efficiency not only in its core Search business but also in Google Cloud Platform and YouTube.
- Revenue growth and increasing operating margins are the key ingredients for strong EPS growth. Google has these, and when also factoring in its share repurchases, you can see why EPS has exploded over the long term.
Alphabet is trading at $357.83 per share, or 29x forward price-to-earnings. Is now a good time to buy? Find out in our full research report, it’s free.
Reddit (RDDT)
Market Cap: $32.63 billion
Founded in 2005 by two University of Virginia roommates, Reddit (NYSE: RDDT) facilitates user-generated content across niche communities (called subreddits) that discuss anything from stocks to dating and memes.
Why Should You Buy RDDT?
- Domestic Daily Active Visitors have increased by an average of 14.4% annually, giving it the potential for margin-accretive growth if it can develop valuable complementary products and features
- Switching costs of its platform were on full display over the last two years as it not only grew engagement but also increased the average revenue per user by 34.8% annually
- Strong free cash flow margin of 30.1% enables it to reinvest or return capital consistently, and its rising cash conversion increases its margin of safety
At $165.35 per share, Reddit trades at 20.7x forward EV/EBITDA. Is now the time to initiate a position? See for yourself in our in-depth research report, it’s free.
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