The rising imperative for rapid and efficient connectivity has set the stage for the internet industry to thrive, suggesting its potential to sustain the surge in the foreseeable future.
My assessment indicates that internet stock Travelzoo (TZOO) is a solid portfolio addition now. On the other hand, I believe MercadoLibre, Inc. (MELI) is worth holding, and ContextLogic Inc. (WISH) is best avoided now.
The global landscape is progressively shifting toward digitalization, with the internet at the forefront driving its transition. Internet accessibility continues to expand globally, witnessing a 2.1% year-on-year surge, taking the total number of global users to 5.19 billion as of July 2023, which encompasses 64.5% of the world's population.
This trend is primarily driven by factors including the meteoric rise in smartphone usage, surging e-commerce, the integration of Internet of Things (IoT) enabled platforms, and the wireless sensors installation within smart infrastructures. The global broadband internet service market is forecasted to reach $470.49 billion by 2027, growing at a CAGR of 3.8%.
Supplementing this, government support for digital transformation initiatives has catalyzed the ongoing digital revolution. The forecasted bridging of the digital divide holds promising implications for enhancing individual empowerment, stimulating economic growth, and fostering innovation.
Further enhancing the sector’s progression is the usage of cutting-edge technology Ambient temperature thermoelectric generators (ATEGs). As we see an ongoing upsurge in the internet services demand, integrating ATEGs could guarantee sustainability and efficiency, potentially revolutionizing the internet industry.
Given this backdrop, fundamentally strong internet stock TZOO could be a solid portfolio addition. However, it could be wise to hold MELI and avoid WISH.
Stock to Buy:
Travelzoo (TZOO)
TZOO is a global internet media company that offers travel, entertainment, and lifestyle experiences. The company’s segments include Travelzoo North America; Travelzoo Europe; and Jack’s Flight Club. As of June 30, 2023, the company had 30.8 million members worldwide.
On July 26, TZOO’s board of directors authorized repurchasing up to 1 million shares of the company's outstanding common stock.
On July 20, TZOO won the top spot in the "Best Travel Deals Provider" category in a nationwide consumer survey in Germany. The win has particular significance given that Germany is the third-largest travel market in the world. The company was also recognized for "high customer value" in a second national survey this month, commissioned by the popular broadsheet BILD Zeitung.
TZOO’s EBITDA has grown at a 13.6% CAGR over the past five years. Moreover, its EBIT and net income grew at 15.2% and 25.4% CAGRs over the past five years, respectively.
TZOO’s trailing-12-month net income margin of 12.37% is 266.3% higher than the 3.38% industry average. Its trailing-12-month ROCE, ROTC, and ROTA of 244.38%, 39.22%, and 16.15% are significantly higher than the industry averages of 3.24%, 3.87%, and 1.54%, respectively.
In the fiscal second quarter that ended June 30, 2023, TZOO’s revenues increased 19.4% year-over-year to $21.13 million, while its gross profit stood at $18.25 million, up 17.5% year-over-year. The company’s non-GAAP operating income increased 57.4% from the year-ago quarter to $4.15 million.
Net income attributable to TZOO increased 155.4% year-over-year to $2.63 million, while its net income per share rose 112.5% from the prior-year quarter to $0.17. Also, its total current liabilities stood at $36.23 million as of June 30, 2023, compared to $47.53 million as of December 31, 2022.
Analysts expect TZOO’s revenue and EPS to increase 16.8% and 34.3% year-over-year to $18.52 million and $0.09 in the fiscal third quarter ending September 2023. For the fiscal year ending December 2023, its revenue and EPS are expected to increase 17.4% and 39.6% year-over-year to $82.85 million and $0.78, respectively.
Over the past year, the stock has gained 18.2% to close the last trading session at $7. It has also gained 57.3% year-to-date.
TZOO’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy 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 an A grade for Quality and B for Growth, Value, Momentum, and Sentiment. Within the 58-stock Internet industry, it is ranked #2.
Click here to see TZOO’s additional rating for Stability.
Stock to Hold:
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 revenue grew at a CAGR of 62.9% over the past three years. Its EBITDA and total assets grew at 733.8% and 40.9% CAGRs, respectively, over the same period.
MELI’s trailing-12-month gross profit margin of 56.33% is 59.1% higher than the 35.41% industry average. Its trailing-12-month EBITDA margin of 16.61% is 54.8% higher than the 10.73% industry average.
MELI’s forward EV/Sales and Price/Sales of 5x and 4.84x are 316.5% and 450.3% higher than the industry averages of 1.20x and 0.88x, respectively. Its forward non-GAAP P/E multiple of 67.98 is 332.6% higher than the industry average of 12.72.
For the fiscal second quarter that ended June 30, 2023, MELI’s net sales increased 31.5% year-over-year to $3.42 billion, while 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.
However, for the six months that ended June 30, 2023, MELI’s net cash used in financing activities stood at $472 million, compared to net cash provided by financing activities of $586 million for the six months that ended June 30, 2022. Also, as of June 30, 2023, its total current liabilities stood at $9.63 billion, compared to $8.56 billion as of December 31, 2022.
Analysts expect MELI’s revenue and EPS for the fiscal third quarter (ending September 2023) to come in at $3.52 billion and $5.28, indicating an increase of 31% and 106.4% year-over-year, respectively. Moreover, the company has topped the consensus EPS estimates in three of the trailing four quarters.
Over the past year, the stock has gained 29.7% to close the last trading session at $1,328.36. The stock gained 15.1% over the past month.
MELI has an overall rating of C, which translates to Neutral in our POWR Ratings system.
It has a B for Sentiment and Growth and a D for Value. MELI is ranked #19 in the Internet industry.
Beyond what is stated above, we have also given MELI grades for Momentum, Stability, and Quality. Get access to all the MELI ratings here.
Stock to Avoid:
ContextLogic Inc. (WISH)
WISH is a mobile e-commerce company that operates the Wish platform, which connects users to merchants. It combines technology and data science capabilities and a discovery-based mobile shopping experience to create a visual, entertaining, and personalized user shopping experience.
Its revenue has decreased at CAGRs of 33% and 12.3% over the past three and five years, respectively. Also, its total assets have declined at a 16.4% CAGR over the past three years.
WISH’s trailing-12-month gross profit margin of 22.75% is 35.8% lower than the industry average of 35.41%. Likewise, its trailing-12-month ROCE, ROTC, and ROTA of negative 79.10%, 45.69%, and 69.01% compared to the industry averages of 10.31%, 5.97%, and 3.65%, respectively.
In the fiscal second quarter that ended June 30, 2023, WISH’s revenue decreased 41.8% year-over-year to $78 million, while its gross profit plunged 61.9% from the year-ago quarter to $16 million. Its loss from operations and net loss stood at $83 million and $80 million, respectively.
The company’s loss per share amounted to $3.38. However, its adjusted EBITDA loss came at $66 million, widening 13.8% year-over-year. As of June 30, 2023, WISH's total current assets stood at $565 million, compared to $777 million as of December 31, 2022.
Analysts expect WISH’s EPS to remain negative at $2.38 for the fiscal third quarter ending September 2023. Its revenue for the same quarter is expected to decline by 53.8% year-over-year to $57.70 million. Moreover, it failed to surpass the consensus EPS and revenue estimates in each of the trailing four quarters.
Over the past year, the stock has lost 88.8% to close the last trading session at $6.21. The stock declined 21.8% over the past three months.
WISH’s weak fundamentals are reflected in its POWR Ratings. It has an overall rating of D, equating to Sell in our proprietary rating system.
It has an F grade for Stability and Sentiment and a D for Momentum and Quality. WISH is ranked #50 within the same industry.
Click here to see other ratings of WISH for Growth and Value.
What To Do Next?
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MELI shares were trading at $1,325.40 per share on Wednesday morning, down $2.96 (-0.22%). Year-to-date, MELI has gained 56.62%, versus a 17.86% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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