The internet industry appears poised for exponential growth, serving as the foundation for the rapid transition in this digital era. The widespread integration of the Internet into our daily activities creates a fertile ground for companies providing services through the Internet. Given the expected boost the industry might receive from this holiday season, it could be wise to add fundamentally strong internet stocks eBay Inc. (EBAY), Amazon.com, Inc. (AMZN), and Pinterest, Inc. (PINS) to one’s watchlist.

Before diving deeper into the fundamentals of these stocks, let’s discuss why the internet industry is well-positioned for growth and how the holiday season can be a solid performance driver for industry participants.

The pandemic accelerated the adoption of digital services, boosting internet use, especially for e-commerce, online learning, and remote work. The increasing Internet penetration has created global opportunities for companies providing their products and services over the Internet.

According to the Census Bureau of the Department of Commerce, U.S. retail e-commerce sales for the third quarter rose 2.3% sequentially to $284.10 billion. The impact of the Internet can be gauged from e-commerce sales during the third quarter of 2023, as it formed 15.6% of total sales.

Despite worries about high interest rates and an uncertain macroeconomic climate, holiday sales are expected to remain robust. According to an ICSC report, holiday spending is expected to reach $1.6 trillion, with three-fourths of shoppers planning to buy goods online.

Meanwhile, Adobe Analytics has projected online holiday sales to rise 4.8% year-over-year to $221.80 billion, with buy now, pay later (BNPL) expected to drive $17 billion in online spending.

E-commerce is poised to capture 41% of global retail sales by 2027, up from 18% in 2017. This expected growth indicates a consistently expanding market, anticipating further growth during the holiday season as consumers embark on a shopping surge.

The growth in online shopping can be attributed to the rise in internet users. Statista reported 5.18 billion global internet users, covering about two-thirds of the world's population in 2023. The United States, a significant online market, has over 90% internet access among Americans and is home to leading internet companies.

Considering these conducive trends, let’s take a look at the fundamentals of the three Internet stocks to watch, starting with number three from the investment point of view.

Stock #3: eBay Inc. (EBAY)

EBAY operates marketplace platforms that connect buyers and sellers in the United States and internationally. The company's marketplace platform includes its online marketplace at eBay.com and the eBay suite of mobile apps. Its platforms enable users to list, buy, and sell various products.

In terms of the trailing-12-month gross profit margin, EBAY’s 72.13% is 102.3% higher than the 35.65% industry average. Its 4.80% trailing-12-month Capex/Sales is 53.5% higher than the 3.13% industry average.

However, the stock’s 22.57% trailing-12-month EBIT margin is 202.5% lower than the 7.46% industry average.

For the fiscal third quarter that ended September 30, 2023, EBAY’s net revenues increased 5% year-over-year to $2.50 billion. Its gross profit rose 3.6% year-over-year to $1.80 billion. Also, its non-GAAP EPS rose 3% over the prior year’s quarter to $1.03.

Its non-GAAP net income from continuing operations declined marginally year-over-year to $545 million.

Street expects EBAY’s EPS and revenue for the fiscal quarter ending March 31, 2024, to increase 3.5% and 1% year-over-year to $1.15 and $2.53 billion, respectively. It surpassed the consensus EPS estimate in each of the trailing four quarters. Over the past month, the stock has declined 0.9% to close the last trading session at $40.39.

EBAY’s POWR Ratings reflect an uncertain outlook. It has an overall rating of C, equating to a Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has a C grade for Value, Stability, and Sentiment. Within the Internet industry, it is ranked #22 out of 58 stocks. In addition to the POWR Ratings stated above, click here to see EBAY’s additional POWR Ratings for Growth, Momentum, and Quality.

Stock #2: Amazon.com, Inc. (AMZN)

AMZN engages in the retail sale of consumer products and subscriptions through online and physical stores in North America and internationally. It operates through three segments: North America, International, and Amazon Web Services (AWS). The company's products offered through its stores include merchandise and content purchased for resale and products offered by third-party sellers.

On November 21, 2023, AMZN and DXC Technology expanded their strategic partnership to speed up cloud adoption and digital transformation for around 1,000 customers. The collaboration prioritizes fast cloud migration and asset transformation, moving from old data centers to embrace AWS cloud technology.

Adam Selipsky, AWS CEO at AMZN, mentioned that AWS and DXC aim to change what's possible for enterprise customers, fostering long-term success. He adds that AWS is committed to transforming DXC's service delivery into a cloud-centric model through training over 15,000 professionals on AWS."

On November 20, 2023, AWS (Amazon Web Services) revealed that Yellow.ai, a global leader in conversational AI, selected AWS as its preferred cloud provider for generative AI-powered voice bot and chatbot solutions. After migrating to AWS, Yellow.ai saw a 20% drop in operational costs, a 15% performance boost, and a 10% reduction in infrastructure costs, indicating AWS’ strong prowess.

In terms of the trailing-12-month EBITDA margin, AMZN’s 13.35% is 21% higher than the 11.04% industry average. Its 9.88% trailing-12-month Capex/Sales is 215.8% higher than the 3.13% industry average. However, the stock’s 6.57% trailing-12-month levered FCF margin is 21.9% lower than the 5.39% industry average.

AMZN’s total net sales for the fiscal third quarter that ended September 30, 2023, increased 12.6% year-over-year to $143.08 billion. Its operating income rose significantly year-over-year to $11.19 billion. Moreover, the company’s net income and EPS came in at $9.88 billion and $0.94, respectively, representing a significant increase over the prior-year quarter.

For the quarter ending December 31, 2023, AMZN’s EPS is expected to increase significantly year-over-year to $0.76. Likewise, its revenue for the same quarter is expected to increase 11.2% year-over-year to $165.85 billion. It surpassed the consensus EPS estimate in three of the trailing four quarters. Over the past year, the stock has gained 52.9% to close the last trading session at $143.90.

AMZN’s POWR Ratings reflect a promising outlook. It has an overall rating of B, equating to a Buy in our proprietary rating system.

It has an A grade for Sentiment and a B for Growth, Momentum, and Quality. It is ranked #15 out of 58 stocks in the same industry. To see AMZN’s Value and Stability ratings, click here.

Stock #1: Pinterest, Inc. (PINS)

PINS operates as a visual discovery engine in the United States and internationally. The company's engine allows people to find ideas and offers organizing and planning tools. It shows organic recommendations and an advertising engine based on pinners' tastes and preferences, enabling pinners with shoppable product pins.

In terms of its trailing-12-month gross profit margin, PINS’ 76.53% is 56.8% higher than the 48.81% industry average. Likewise, its 11.75% trailing-12-month levered FCF margin is 53.5% higher than the 7.65% industry average. Furthermore, the stock’s 0.84x trailing-12-month asset turnover ratio is 63.8% higher than the 0.52x industry average.

For the third quarter ended September 30, 2023, PINS’ revenue increased 11.5% year-over-year to $763.20 million. Its non-GAAP net income rose 152.7% over the prior-year quarter to $193.34 million. The company’s adjusted EBITDA increased 138.9% year-over-year to $184.67 million. In addition, its non-GAAP EPS came in at $0.28, representing an increase of 154.5% year-over-year.

Analysts expect PINS’ EPS and revenue for the quarter ending December 31, 2023, to increase 76.7% and 12.4% year-over-year to $0.51 and $985.86 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 39.1% to close the last trading session at $31.57.

It’s no surprise that PINS has an overall rating of B, which translates to a Buy in our proprietary rating system.

It is ranked #11 in the Internet industry. It has an A grade for Growth and Quality and a B for Sentiment. Click here to see PINS’ Value, Momentum, and Stability ratings.

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AMZN shares were trading at $146.54 per share on Wednesday morning, up $2.64 (+1.83%). Year-to-date, AMZN has gained 74.45%, versus a 20.10% rise in the benchmark S&P 500 index during the same period.

Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.

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