6 min read
This story originally appeared on StockNews
Internet stocks have some of the fastest growth and highest margins which makes them an attractive group. Recently, the sector has dipped along with many tech stocks. Investors should consider buying Facebook (FB), Yelp (YELP), and Cars.com (CARS).
Since the market bottomed in March 2020 during the worst of the coronavirus crisis, we’ve been in a powerful bull market, underpinned by low rates, fiscal stimulus, earnings growth, and an improving economy. Many stocks made extraordinary moves during the second half of 2020. However, over the past couple of months, there have been some subtle changes in the market environment, despite indices like the S&P 500 and Dow Jones Industrials continuing to trend higher.
The most notable development has been the sharp sell-off in certain parts of the market, such as the tech sector and growth stocks, that were among the biggest winners of last year. Many of these stocks had high multiples and were among the frothier sectors which made them more vulnerable to weakness.
Ultimately, this is a healthy development as the market digests these gains. And the market rotation is creating some fantastic opportunities to pick up high-quality stocks at a discount. I believe this is especially true for Internet stocks, especially since many companies in this industry posted strong earnings results recently. 3 Internet stocks that investors should consider buying are Facebook (FB), Cars.com (CARS), and Yelp (YELP).
FB shares were under pressure earlier this year as many were concerned that the new privacy changes in Apple’s iOS14 would negatively impact Facebook’s ad business. While this is certainly a near-term headwind, it could be a blessing in the long-term.
As a result, the company is pivoting to e-commerce. Currently, companies use Facebook to reach and engage customers but then sales are taken off the platform. Based on early experiments on Instagram, it seems that Facebook is creating tools to let vendors sell directly on its platform. This could increase conversions for businesses and margins for Facebook.
The upside on advertising revenue is limited, while there’s much greater capacity for growth when it comes to e-commerce revenue. This could signify another shift in Facebook’s evolution and mark its second growth phase.
However, the company’s recent earnings report shows that its ad business continues to perform very well and is receiving a boost from faster economic growth as businesses are spending more on advertising.
In Q1, revenue increased by 48%, topping estimates by a significant margin. Monthly active users increased by 10% to 2.85 billion. The combination of strong earnings growth and a flat stock price have made shares quite attractive from a valuation perspective with a forward price to earnings ratio of 20.
FB has an overall grade of B, which translates into a Buy rating in the POWR Ratings system. The company has a Sentiment Grade of A, which is consistent with its strong evaluations by Wall Street analysts. Forty-five out of 49 analysts rate the stock as a Strong Buy or Buy.
We also grade FB based on Quality, Growth, Value, Momentum, and Stability. You can find those grades here. FB is ranked #4 in the Internet industry. You can find other top stocks in the industry by clicking here.
CARS is one of the fastest-growing used car sellers in the US. Currently, used car prices are spiking due to the strong economy and production disruptions for new cars. This is having a variety of effects including a spike in car rental rates.
This is quite a surprise given the bleak outlook of a year ago. However, the economy turned out to be stronger than expected. Further, the stimulus payments helped shore up demand as did low rates which boosted affordability.
So, it’s not surprising that CARS is thriving especially as younger buyers will instinctively shop online for a used car. CARS is particularly attractive with a forward PE of 7.6. This attractive valuation makes it a buyout target especially for legacy used car retailers, looking to increase their online presence.
The POWR Ratings are also constructive on the stock as it is rated a B which translates to a Buy. B-rated stocks have an average annual performance of 19.7% which compares favorably to the S&P 500’s annual performance of 7.3%. CARS is also rated a B for Value which is consistent with its low price to sales ratio and forward PE. To see more of CARS’ component grades including Growth, Quality, Stability, Sentiment, Industry, and Momentum, click here.
YELP was a momentum darling early in the last decade as it was the premier destination for online reviews. However, the company was unable to deliver on its promise especially as Google started promoting their own reviews over Yelp’s. This stalled the company’s momentum as it was reliant on Google for incoming traffic.
YELP remains more than 60% off its 2014 high. However, the stock is starting to look interesting on a technical and fundamental basis. Technically, it’s been basing for the last six years between $20 and $50. Over that period, valuations have improved especially from a revenue perspective.
Most important, now there is a potential catalyst as Internet stocks are posting strong earnings due to higher ad rates. Essentially, accelerating economic growth means that businesses are spending more on marketing and willing to pay higher rates to reach customers. As one of the top review sites, Yelp should benefit as businesses can reach customers through the platform.
The POWR Ratings are also bullish on Yelp as it’s rated a B which translates to a Buy. It has a B for Value which is not surprising given its very reasonable price to sales ratio of 3.2 which is significantly cheaper than its peers. Further, the stock has attractive gross margins of 93% which means that higher ad rates should lead to a meaningful boost in earnings.
Discover Today’s Best Growth Stocks
This article was written by Jaimini Desai, Chief Growth Strategist for StockNews.com. Jaimini has been dialed into the hottest trends in investing:
- Electric Vehicles
- Internet of Things
- Cloud Computing
- And Much More
If you would like to see more of his best growth stock ideas, then click the link below.
FB shares were trading at $318.07 per share on Thursday afternoon, up $4.48 (+1.43%). Year-to-date, FB has gained 16.44%, versus a 11.42% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of POWR Growth newsletter. Learn more about Jaimini’s background, along with links to his most recent articles.