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Outlook for Internet Delivery Services Industry Looks Dull

Zacks Equity Research

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

Being growth-stage companies, the 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 three 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 a fast progress in speed and deliverability, bodes well for this industry.

  • Shift in consumer preferences, driven by convenience and easy accessibility, is expected 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 concern.

  • Online delivery is yet to expand beyond the major metros, reflecting lower penetration and a 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. Notably, Amazon led a $575-million fundraiser in Deliveroo in May this year. We believe, Amazon’s powerful distribution channels are a major forte that might massively threaten the incumbents in this industry. Also, the search giant Alphabet (GOOGL) has forayed into the food delivery market with its delivery arm Wing and an array of food delivery apps, which are likely to stiffen competition further.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Internet – Delivery Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #217, which places it at the bottom 15% 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.

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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 4.2% 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 Lags in Terms of Stock Market Performance

The Zacks Internet - Delivery Services industry has underperformed both the Zacks S&P 500 composite and the broader sector in the past year.

The industry has declined 27.9% against the S&P 500’s increase of 0.9%. Further, it underperformed the broader sector’s dip of 1.4%.

One Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-sales ratio (P/S), which is a commonly used multiple for valuing the Internet delivery stocks, the industry is currently trading at 1.03X compared with the S&P 500’s 3.25X and the sector’s 3.29X.

Over the past five years, the industry has traded as high as 3.77X, as low as 0.73X and recorded a median of 1.06X 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 the participants in the Internet – Delivery Services industry.

However, steep marketing expenses due to the planned expansion into new delivery markets will be a persistent overhang on the margins in the near term.

Currently, none of the stocks in the Zacks Internet – Delivery industry flaunts either a Zacks Rank #1 (Strong Buy) or a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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

Austin, TX-based Asure Software Inc. (ASUR) is a provider of cloud-based human capital management and workspace management solutions. The company delivered average four-quarter positive surprise of 23.07%. The Zacks Consensus Estimate for current-year earnings has moved a couple of cents north over the past 30 days.

Price and Consensus: ASUR

 

Chicago-based GrubHub Inc. (GRUB) is a leading online and mobile food ordering company. Its platform assists diners in their search for local restaurants, helps them track orders and re-order for convenience. The Zacks Consensus Estimate for the current fiscal-year earnings has been lowered 6.4% over the past 30 days.

Price and Consensus: GRUB

 

Headquartered in Scottsdale, AZ, GoDaddy Inc. (GDDY) is engaged designing and developing cloud-based technology products for small businesses, web design professionals and individuals. The Zacks Consensus Estimate for current-year earnings has been revised 28.8% downward over the past 30 days.

Price and Consensus: GDDY



Guangzhou-based Vipshop Holdings Limited (VIPS) is an online discount retailer for various brands in the People's Republic of China. The company offers apparels for men and women, shoes for casual and formal occasions, and accessories for both women and men. The Zacks Consensus Estimate for current-year earnings has moved a couple of cents south over the past 30 days.

Price and Consensus: VIPS


 

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Vipshop Holdings Limited (VIPS) : 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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