The ongoing digitization and increasing global Internet usage enhance the potential for businesses that provide their products or services online. Therefore, the Internet industry players Netflix, Inc. (NFLX), MercadoLibre, Inc. (MELI), and Pinterest, Inc. (PINS) could be worth adding to one’s watchlist for opportune entry points.
The United States is a significant hub of internet usage, with over 307 million internet users. More than 90% of Americans have internet access, and it has profoundly impacted various aspects of daily life, including email, search engines, video streaming, social networking and e-commerce.
Moreover, the internet sector is booming, thanks to the widespread digital transformation sweeping through various industries. The increasing prevalence of online retail, the digitization of medical records, the adoption of e-government programs, and the rapid proliferation of media and entertainment platforms propel the growth of the Internet industry.
Wireless technology is a pivotal driver of global digital transformation, enhancing efficiency and reducing expenses across diverse sectors and fields. Government initiatives for infrastructure development, especially in smart city projects, fuel the market’s growth. The global wireless internet services market is expected to grow at a CAGR of 7% to reach $921.87 billion by 2027.
With these favorable trends in mind, let's delve into the fundamentals of the three Internet stocks worth adding to your watchlist, beginning with the third choice.
Stock #3: Netflix, Inc. (NFLX)
NFLX provides entertainment services, such as TV series, documentaries, feature films, and mobile games across various genres and languages. The company allows its members to access streaming content through various internet-connected devices, such as TVs, digital video players, and mobile devices.
NFLX’s trailing-12-month EBIT and levered FCF margins of 17.51% and 55.60% are 127.1% and 629.3% higher than the 7.71% and 7.62% industry average.
Recently, NFLX announced price increases for its Basic and Premium plans in the US, UK, and France, with the new prices set at $11.99 and $22.99, respectively, up from $9.99 and $19.99. Their ad-supported and Standard plans will maintain their current pricing.
In the second quarter, which ended June 30, 2023, NFLX’s revenues increased 7.8% year-over-year to $8.54 billion. Its operating income rose 25% from the year-ago quarter to $1.92 billion.
The company’s net income and EPS came in at $1.68 billion and $3.73, up 20% and 20.3% from the prior-year quarter, respectively. Also, NFLX’s free cash flow rose 300% year-over-year to $1.89 billion.
The company's objectives for the fiscal year 2023 are to accelerate revenue growth, expand operating margin, and increase free cash flow. NFLX anticipates revenue of $8.70 billion in the fourth quarter, an 11% year-over-year increase, or 12% when adjusted for currency fluctuations.
It is also updating its fiscal year 2023 operating margin guidance to 20%, the high end of the prior 18% to 20% range. This represents a 2% increase from last year's 18% operating margin.
Street expects NFLX’s revenue and EPS for the third quarter (ending December 2023) to increase 11.7% and significantly year-over-year to $8.77 billion and $2.20. The company has an impressive earnings surprise history, surpassing the EPS estimates in three of the trailing four quarters.
Over the past year, the stock has gained 43.7% to close the last trading session at $346.19.
NFLX’s POWR Ratings reflect this promising outlook. The stock has an overall rating of C, equating to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has a B grade for Quality. In the 59-stock Internet industry, it is ranked #26.
Watch NFLX’s Growth, Value, Momentum, Stability, and Sentiment ratings here.
Stock #2: MercadoLibre, Inc. (MELI)
Headquartered in Montevideo, Uruguay, MELI is an online commerce platform operator in Latin America. The company’s automated online platform allows businesses, merchants, and individuals to list merchandise and conduct sales and purchases online. It also operates a financial technology solution platform called Mercado Pago FinTech.
MELI’s trailing-12-month EBIT and EBITDA margins of 12.71% and 16.61% are 52% and 72.8% higher than the 10.93% and 7.36% industry average.
On September 19, MELI announced the redemption of all its outstanding 2% Senior Convertible Notes due 2028 on November 14, 2023, with $439,075,000 in principal amount currently outstanding. The company plans to use treasury shares to settle conversions, saving approximately $44 million in interest expenses.
In the fiscal second quarter that ended June 30, 2023, MELI’s net sales increased 31.5% year-over-year to $3.42 billion. Its gross profit stood at $1.72 billion, up 34% year-over-year. Its income from operations grew 123.2% year-over-year to $558 million.
The company’s net income and earnings per share were $262 million and $5.16, up 113% and 112.3% year-over-year, respectively.
MELI’s EPS and revenue for the fiscal third quarter (ended September 2023) are expected to grow 120.4% and 32.1% year-over-year to $5.64 and $3.55 billion. Moreover, the company has topped the consensus EPS estimates in three of the trailing four quarters.
Over the past year, the stock has gained 42% to close the last trading session at $1,211.70. The stock gained 43.2% year-to-date.
MELI has an overall rating of C, which translates to Neutral in our POWR Ratings system.
It has an A grade for Quality and a B for Growth. MELI is ranked #25 in the same industry.
Beyond what is stated above, we have also given MELI grades for Value, Momentum, Stability, and Sentiment. Get all MELI ratings 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 like recipes, home and style inspiration, and others.
PINS’ trailing-12-month gross profit and levered FCF margins of 14.32% and 75.48% are 54% and 87.9% higher than its industry averages of 49.02% and 7.62%.
During an Investor Day presentation, PINS recently presented an optimistic outlook for its business. The company anticipates “high-single-digit range” revenue growth for the third quarter.
PINS’ revenue for the second quarter (ended June 30, 2023) increased 6.3% year-over-year to $708.03 million. Its adjusted EBITDA improved by 16.3% from the year-ago quarter to $107.02 million.
The company’s non-GAAP net income amounted to $142.09 million and $0.21 per share, up 83.7% and 90.9% from the prior-year quarter, respectively.
Analysts expect PINS’ EPS and revenue to rise 79.2% and 8.6% from the previous-year quarter to $0.20 and $743.06 million in the fiscal third quarter that ended September 2023. Additionally, the company surpassed the EPS estimates in each of the trailing four quarters and revenue estimates in three of the trailing four quarters, which is excellent.
PINS’ shares have gained 15.1% over the past year and 5.6% over the past month to close the last trading session at $26.83.
Unsurprisingly, PINS has an overall rating of C, equating to a Neutral in our proprietary rating system.
It has an A grade for Quality. Within the Internet industry, it is ranked #22.
In addition to the POWR Ratings stated above, one can access PINS’ ratings for Growth, Value, Momentum, Sentiment, and Stability here.
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NFLX shares were trading at $399.42 per share on Thursday afternoon, up $53.23 (+15.38%). Year-to-date, NFLX has gained 35.45%, versus a 13.92% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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