Despite macroeconomic uncertainties, the internet industry thrives with accelerated digitalization, expanding smart infrastructure, and government initiatives. Given these factors, it could be wise to buy fundamentally strong internet stock, Netflix, Inc. (NFLX). However, Snap Inc. (SNAP) could be best avoided, considering its weak fundamentals.
Before diving deeper into the fundamentals of these stocks, let’s discuss why the Internet industry is well-positioned for growth.
The internet industry is booming with the rise in digital service adoption, leading to increased internet usage in areas like e-commerce, entertainment, and remote work. Despite presenting global opportunities, it also confronts challenges stemming from intense competition.
Even so, the ongoing wireless technology revolution enhances productivity and reduces costs. The global wireless internet services market is projected to reach $921.97 billion by 2027, with a 7% CAGR.
According to Statista, there are 5.18 billion global internet users, connecting two-thirds of the world's population. The U.S. has over 90% internet access and hosts leading companies. On top of it, internet access in the United States is expected to rise by 3.9% between 2024 and 2028, reaching a new peak of 97.6% in 2028.
The video streaming and OTT industry, centered on entertainment, is positioned for 2024 growth, driven by increasing consumer interest in flexible, on-the-go access to diverse, real-time content and a growing video-on-demand user base. The global video streaming market is expected to reach $1.90 trillion by 2030, growing at a 19.3% CAGR.
Furthermore, the adoption of 5G services is on the rise. The growing utilization of IoT-connected devices and the need for ultra-low latency to elevate user experiences, contribute positively to the internet sector. The global 5G infrastructure market is anticipated to reach $348.76 billion by 2030, with a remarkable CAGR of 45.2%.
Considering these trends, let’s take a look at the fundamentals of the two above-mentioned Internet stocks.
Stock to Buy:
Netflix, Inc. (NFLX)
NFLX provides entertainment services. It offers TV series, documentaries, feature films, and mobile games across various genres and languages. The company provides members the ability to receive streaming content through a host of internet-connected devices, including TVs, digital video players, television set-top boxes, and mobile devices.
In terms of the trailing-12-month EBIT margin, NFLX’s 18.35% is 133.3% higher than the 7.87% industry average. Its 55.05% trailing-12-month levered FCF margin is 600.1% higher than the 7.86% industry average. Moreover, the stock’s 21.23% trailing-12-month ROCE is 546.6% lower than the 3.28% industry average.
For the third quarter that ended September 30, 2023, NFLX’s revenue increased 7.8% year-over-year to $8.54 billion. Its operating income rose 25% over the prior year quarter to $1.92 billion. In addition, the company’s net income and EPS increased 20% and 20.3% year-over-year to $1.68 billion and $3.73, respectively.
For the quarter ending December 31, 2023, NFLX’s EPS is expected to increase significantly year-over-year to $2.23. For the same quarter, its revenue is expected to increase 10.8% year-over-year to $8.70 billion. It surpassed the consensus EPS estimate in three of the trailing four quarters. Over the past year, the stock has gained 71.7% to close the last trading session at $495.02.
NFLX’s POWR Ratings reflect a positive outlook. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Growth and Quality. It is ranked #7 out of the 57 stocks in the Internet industry. To see NFLX’s Value, Momentum, Stability, and Sentiment ratings, click here.
Stock to Sell:
Snap Inc. (SNAP)
SNAP operates as a technology company in North America, Europe, and internationally. The company offers Snapchat, a visual messaging application with various tabs, such as camera, visual messaging, snap map, stories, and spotlight, that enable people to communicate visually through short videos and images.
In terms of the trailing-12-month levered FCF margin, SNAP's 5.34% is 32% lower than the 7.86% industry average.
SNAP’s revenue for the third quarter that ended September 30, 2023, came in at $1.19 billion. Its operating loss narrowed 12.7% year-over-year to $380.06 million. Its adjusted EBITDA came in at $40.09 million, down 44.8% over the prior-year quarter.
Moreover, the company's non-GAAP net loss widened 2.4% year-over-year to $368.26 million. And its non-GAAP net loss per share decreased 75% year-over-year to come in at $0.02.
Street expects SNAP’s EPS for the quarter ending December 31, 2023, to decrease 57.9% year-over-year to $0.06. Over the past month, the stock has gained 44.5% to close the last trading session at $17.18.
SNAP’s weak prospects are reflected in its POWR Ratings. It has an overall D rating that translates to Sell in our POWR Ratings system.
It has a D grade for Stability, Sentiment, and Quality. It is ranked #55 in the Internet industry. To access SNAP’s grades for Growth, Value, and Momentum, click here.
What To Do Next?
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NFLX shares were trading at $498.81 per share on Wednesday morning, up $3.79 (+0.77%). Year-to-date, NFLX has gained 69.16%, versus a 26.19% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
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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