Amid Snap Inc.’s (SNAP) predicaments, including speculations about its AI, declining sales, an unfavorable sales outlook, and a federal securities law probe, this article explores the fundamentals of three internet stocks, Alphabet Inc. (GOOGL), Travelzoo (TZOO), and Yelp Inc. (YELP), which could be better portfolio additions than SNAP. 

Let’s understand this in detail.

The social messaging business' My AI briefly exhibited autonomy by autonomously posting its own Story and ceasing user interaction, triggering profound apprehensions about privacy. Although the company stated that it was just a glitch, this transient disruption underscored broader apprehensions regarding generative AI advancement, eliciting fervent reactions from users.

Additionally, the company recorded a 4% decline in second-quarter sales compared to the previous-year period, marking the second consecutive period of year-over-year revenue contraction from the $1.11 billion achieved during the corresponding period.

Furthermore, SNAP anticipates total sales for the third quarter to range between $1.07 billion and $1.13 billion, indicating a "negative 5% to flat year-over-year growth." In response to this announcement, the Klein Law Firm has initiated an investigation into potential violations of federal securities laws by SNAP.

Conversely, the relentless march of digitalization and the widespread adoption of smartphones are fueling substantial growth in internet usage. As of April 2023, the global count of internet users has surged to 5.18 billion, encompassing an impressive 64.6% of the world's population, as reported by Statista.

The ascent of 5G technology is further accelerating the rapid growth of the internet sector, offering faster internet speeds and enhanced connectivity. Simultaneously, the implementation of fixed wireless access, cloud-based infrastructure, and the increasing adoption of Internet of Things (IoT) devices are strengthening the industry's outlook.

Looking ahead, the global wireless internet services market is estimated to grow at a 7% CAGR, reaching $921.97 billion by 2027, as per a report by ReportLinker.

Taking into account the aforementioned factors, given the industrial growth trends, GOOGL, TZOO, and YELP could be better buys than SNAP. To that end, let us dive into the fundamentals of these three Internet industry picks, beginning with number three.

Stock #3: Alphabet Inc. (GOOGL)

GOOGL offers a range of products and platforms. The Google Services segment includes products such as ads, Android, Chrome, and hardware. Google Cloud provides infrastructure, platform services, and collaboration tools for enterprises, while the Other Bets segment explores various technologies beyond Google's core business.

On May 23, GOOGL unveiled Product Studio, a groundbreaking generative AI tool designed for enhancing e-commerce visuals. This innovation is expected to elevate product presentations on GOOGL's platform, demonstrating the company's AI capabilities and engineering prowess.

In addition, it could solidify GOOGL's position as an industry leader, enhancing its market attractiveness and service quality.

GOOGL’s trailing-12-month gross profit margin of 55.59% is 12.6% higher than the industry average of 49.37%. Its trailing-12-month EBITDA margin of 31.56% is 70.7% higher than the 18.49% industry average. Also, the stock’s trailing-12-month net income margin of 21.05% is 409.9% higher than the industry average of 4.13%.

For the second quarter that ended June 30, 2023, GOOGL’s revenue increased 7.1% year-over-year to $74.60 billion. Its income from operations rose 12.3% from the year-ago value to $21.84 billion. Furthermore, the company’s net income and EPS grew 14.8% and 19% from the prior year’s period to $18.37 billion and $1.44, respectively.

The consensus revenue estimate of $304.54 billion for the fiscal year ending December 2023 reflects a 7.7% rise year-over-year. Likewise, the consensus EPS estimate of $5.61 for the ongoing year indicates a 23.1% year-over-year improvement. GOOGL’s shares have gained 50.3% over the past six months to close the last trading session at $136.92.

GOOGL’s positive fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

GOOGL has a B grade for Quality and Sentiment. It has ranked #5 in the 60-stock Internet industry.

In addition to the POWR Ratings I’ve just highlighted, you can see GOOGL’s ratings for Growth, Value, Momentum, and Stability here.

Stock #2: Travelzoo (TZOO)

TZOO offers travel, entertainment, and lifestyle experiences through segments Travelzoo North America; Travelzoo Europe; and Jack’s Flight Club. It serves airlines, hotels, cruise lines, tour operators, car rentals, theaters, restaurants, and more, facilitating diverse leisure and travel experiences worldwide.

On July 26, TZOO disclosed board approval for repurchasing up to 1,000,000 shares of its common stock. This move could benefit the company by enhancing shareholder value, signaling confidence in its financial strength, and potentially boosting stock prices through reduced supply, thereby attracting more investors.

TZOO’s trailing-12-month gross profit margin of 86.29% is 74.8% higher than the industry average of 49.37%. The stock’s trailing-12-month net income margin of 12.37% is 199.6% higher than the 4.13% industry average. Moreover, its trailing-12-month asset turnover ratio of 1.12x compares to the 0.48x industry average.

For the second quarter that ended June 30, 2023, TZOO’s revenues increased 19.4% year-over-year to $21.13 million. Its non-GAAP operating income rose 57.4% from the prior year’s period to $4.15 million. Also, the company’s net income and net income per share grew 151.7% and 112.5% year-over-year to $2.66 million and $0.17, respectively.

For the fiscal year ending December 2023, analysts expect TZOO’s revenue to increase 17.4% year-over-year to $82.85 million. The company’s EPS for the current year is expected to grow 43.2% from the prior year to $0.80. The stock has gained 25.4% over the past six months, closing the last trading session at $6.13.

TZOO’s solid prospects are reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

TZOO has an A grade for Quality and a B for Value, Momentum, and Sentiment. It is ranked #2 within the same industry.

Click here to access the additional TZOO ratings (Growth and Stability). 

Stock #1: Yelp Inc. (YELP)

YELP connects consumers with local businesses, providing advertising products for businesses to reach a broad audience and promote their offerings effectively. It also offers interactive tools to facilitate transactions between consumers and the local businesses listed on its platform.

YELP’s trailing-12-month gross profit margin of 91.20% is 84.7% higher than the industry average of 49.37%. Its trailing-12-month levered FCF margin of 22.66% is 169.8% higher than the 8.40% industry average. Also, the stock’s trailing-12-month asset turnover ratio of 1.23x is 154.3% higher than the industry average of 0.48x.

For the second quarter that ended June 30, 2023, YELP’s net revenue increased 12.8% year-over-year to $337.13 million. Its adjusted EBITDA grew 24.7% from the year-ago value to $83.94 million.

Furthermore, net income and net income per share attributable to common stockholders rose 83.9% and 90.9% year-over-year to $14.73 million and $0.21, respectively.

The company’s revenue for the fiscal year ending December 2023 is expected to increase 11.4% year-over-year to $1.33 billion. Similarly, analysts expect YELP’s EPS for the ongoing period to come in at $2.85, up 134.1% from the previous year. Moreover, the company topped the consensus revenue estimates in all four trailing quarters.

Over the past six months, the stock has gained 55.1%, closing the last trading session at $43.98.

YELP’s strong outlook is apparent in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

YELP has an A grade for Growth and Quality and a B for Value. It has topped the 60-stock Internet industry.

Click here to access additional YELP ratings for Stability, Sentiment, and Momentum.

What To Do Next?

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GOOGL shares were trading at $135.97 per share on Tuesday morning, down $0.95 (-0.69%). Year-to-date, GOOGL has gained 54.11%, versus a 17.75% rise in the benchmark S&P 500 index during the same period.

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.

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