3 Internet Gems Driving Profits for Investors Increased internet penetration has been a catalyst for digital transformation across various sectors, creating lucrative opportunities for companies providing internet-based services. Hence, it could be wise to invest in quality...
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Increased internet penetration has been a catalyst for digital transformation across various sectors, creating lucrative opportunities for companies providing internet-based services. Hence, it could be wise to invest in quality internet stocks Despegar.com (DESP), D-Market Elektronik Hizmetler (HEPS), and Travelzoo (TZOO) for potential profits. Keep reading….
The surge in internet penetration has enabled businesses to digitize their operations, fueled the growth of e-commerce, revolutionized communication and collaboration within organizations, digitized financial services, facilitated digital transformation in healthcare through telemedicine, and transformed the entertainment and media industries.
Amid this backdrop, fundamentally sound internet stocks Despegar.com, Corp. (DESP), D-Market Elektronik Hizmetler ve Ticaret A.S. (HEPS), and Travelzoo (TZOO) could be ideal investments for solid returns.
The internet has revolutionized our lives in numerous ways, profoundly impacting how we communicate, work, learn, shop, and entertain ourselves. A total number of $5.35 billion people worldwide were using the internet at the start of 2024, equating to around 66.2% of the global population.
Moreover, COVID-19 accelerated the adoption of the internet and digital technologies. The significant surge in internet usage has led to an increased demand for several remote work and communication tools, e-commerce, digital payment platforms, streaming services for entertainment, online learning tools, and telemedicine and digital healthcare solutions.
According to a report by Mordor Intelligence, the e-commerce market is expected to total staggering $18.81 trillion by 2029, expanding at a CAGR of 15.8% during the forecast period (2024-2029). Digital content, financial services, travel and leisure, and e-tailing are among the few e-commerce possibilities available to the internet-connected client base.
The landscape of travel has undergone a transformative shift with the advent of online platforms and technological innovations modernizing how travel booking and accommodations are handled. The global online travel market is projected to reach $1.56 trillion by 2030, growing at a CAGR of 12.9%.
Advances in technology, including the development of faster internet connections like broadband and mobile internet (3G, 4G, and now 5G), have made it easier for people to access high-speed internet from several devices, including smartphones and computers. The global 5G services market size is estimated to hit $664.75 billion by 2028, exhibiting a CAGR of 26.9%.
Meanwhile, supportive government initiatives to promote digital inclusion and bridge the digital divide by providing internet access will boost the industry's prospects.
The Biden-Harris Administration allocated $42.45 billion through the Broadband Equity, Access, and Deployment (BEAD) Program to expand high-speed internet access by funding planning, infrastructure deployment, and adoption plans.
Considering these favorable trends, let's look at the fundamentals of the three best Internet stocks, beginning with the third choice.
Stock #3: Despegar.com, Corp. (DESP)
Headquartered in Buenos Aires, Argentina, DESP is an online travel company that offers a wide range of travel and travel-related products to leisure and corporate travelers through its websites and mobile applications in Latin America and the United States. The company operates in two segments: Travel Business and Financial Services Business.
DESP's trailing-12-month gross profit margin of 66.83% is 88.2% higher than the industry average of 35.51%. Also, the stock's trailing-12-month EBITDA margin and levered FCF margin of 13.35% and 13.39% are higher than the respective industry averages of 10.85% and 5.51%.
In terms of forward EV/EBITDA, DESP is currently trading at 5.58x, 45.2% lower than the industry average of 10.18x. Likewise, the stock's forward EV/Sales multiple of 0.81 is 34.4% lower than the industry average of 1.24.
For the third quarter that ended September 30, DESP's total revenue increased 22.4% year-over-year to $178.15 million, and its gross profit grew 26.5% from year-ago value to $120.55 million. Its operating income came in at $15.25 million, compared to $1.31 million in the previous year's period. Its adjusted EBITDA rose 105.8% year-over-year to $24.73 million.
The company raised its full-year 2023 financial guidance. DESP expects its revenue to be in the range of $690 million and $700 million, compared to the previously guided $670 million-$700 million. Its adjusted EBITDA guidance is expected to be between $105 million and $110 million, up from the prior guidance of $670 million to $700 million.
Analysts expect DESP's revenue for the fiscal year (ending December 2024) to increase 11.8% year-over-year to $773.38 million. The company's EPS for the ongoing year is expected to grow 41.6% year-over-year to $0.64. Moreover, DESP surpassed consensus revenue estimates in three of the trailing four quarters.
DESP's stock has surged 19.8% over the past year to close the last trading session at $8.11.
DESP's bright prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
DESP has a B grade for Value, Sentiment, and Quality. It has ranked #10 out of 52 stocks in the B-rated Internet industry.
In addition to the POWR Ratings stated above, one can access DESP's ratings for Momentum, Growth, and Stability here.
Stock #2: D-Market Elektronik Hizmetler ve Ticaret A.S. (HEPS)
Based in Istanbul, Turkey, HEPS operates e-commerce platforms. The company runs www.hepsiburada.com, a retail website that offers a range of merchandise. Also, it provides HepsiExpress, an on-demand delivery service that delivers groceries, water, and flowers; HepsiJet, which offers last-mile delivery services; and HepsiLojistik, which provides storage and fulfillment services.
On November 30, 2023, HEPS announced that the number of subscribers to Hepsiburada Premium, its paid subscription service, reached 2 million. A Hepsiburada Premium subscription provides a wide range of benefits, including free delivery, a 3% cashback (subject to certain conditions), and free access to an on-demand streaming service, among other features.
"Prioritizing customer loyalty and retention is central to our strategy. Our loyalty program, Hepsiburada Premium, plays a key role in achieving this. It also allows us to reduce and optimize our marketing and advertising spend," said Hepsiburada CEO Nilhan Onal Gökçetekin.
On October 9, HEPS entered a five-year agreement with Visa Inc. (V), a world leader in digital payments, to ensure that its users' digital prepaid cards are accepted worldwide for online and physical purchases. With this partnership, Hepsipay cards will have the Visa logo and will be accepted at any point of sale outside the Hepsiburada platform.
HEPS' trailing-12-month net income margin and levered FCF margin of 5.82% and 7.17% favorably compared to the industry averages of 4.59% and 5.51%, respectively. In addition, the stock's trailing-12-month ROCE of 41.88% is 267.2% higher than the industry average of 11.40%.
In the third quarter that ended September 30, 2023, HEPS' revenue grew 52% year-over-year to TRY 8.06 billion ($262.32 million). Its gross contribution came in at TRY 2.42 billion ($78.76 million), up 63.3% year-over-year. The company's EBITDA was TRY 87.90 million ($2.86 million), compared to an EBITDA loss of TRY 1.03 billion ($33.52 million) in the previous year's quarter.
Furthermore, the company's cash inflows from operating activities grew 156.1% from the prior year's period to TRY 2.24 billion ($72.90 million). Its free cash flow came in at TRY 2.01 billion ($65.42 million), up 275.3% year-over-year.
Street expects HEPS' revenue to grow 20-6% year-over-year to $889.35 million for the fiscal year that ended December 2023. Similarly, the consensus revenue estimate of $1.30 billion for the fiscal year 2024 indicates an improvement of 46.4% year-over-year.
Shares of HEPS have gained 61.1% over the past year to close the last trading session at $1.45.
HEPS' POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
The stock has an A grade for Growth. It also has a B grade for Value, Sentiment, and Momentum. HEPS is ranked #6 out of 52 stocks in the Internet industry.
To access additional ratings of HEPS for Quality and Stability, click here.
Stock #1: Travelzoo (TZOO)
TZOO is a global Internet media company that engages in the provision of travel, entertainment, and local deals from travel and entertainment companies and local businesses. Its products and publications include Travelzoo Website, Travelzoo Network, Travelzoo mobile applications, Jack's Flight Club website, and Jack's Flight Club mobile applications.
On December 14, 2023, TZOO announced membership fees for new members beginning January 1, 2024. The annual membership fee will be $40, and for the existing 30 million Travelzoo members, the fee for this year will be waived.
Holger Bartel, Global CEO and Co-Founder, said: "With the new membership fee, we will be able to negotiate even better, more exclusive offers than would be possible operating as a free service. This is because many top travel suppliers, including luxury hotels, as well as entertainment companies, only want to provide their best offers to a selective group."
TZOO's trailing-12-month gross profit margin of 86.67% is 74.8% higher than the industry average of 49.58%. The stock's trailing-12-month EBIT margin of 17.91% is 115.1% higher than the industry average of 8.33%. Also, its trailing-12-month net income margin of 13.55% is 290.3% higher than the industry average of 3.47%.
During the fiscal third quarter that ended September 30, 2023, TZOO's revenues increased 33% year-over-year to $20.60 million, and its gross profit rose 32.6% from the year-ago value to $17.93 million. The company's operating income came in at $3.11 million, up 1,038.8% from the previous year's period.
In addition, the company's net income came in at $2.40 million, or $0.16 per share, increases of 201.1% and 166.7% from the prior year's quarter, respectively. Net cash provided by operations during the quarter was $3.65 million.
Analysts expect TZOO's revenue to increase 20.1% year-over-year to $84.81 million for the fiscal year that ended December 2023. Its EPS for the same period is expected to grow 52.1% year-over-year to $0.85. Additionally, the company topped the consensus EPS and revenue estimates in three of the four trailing quarters.
For the fiscal year 2024, Travelzoo's revenue and EPS are expected to grow 10.9% and 22.7% from the previous year to $94.05 million and $1.04, respectively.
The stock has climbed 25% over the past six months and 65.5% over the past year to close the last trading session at $8.24.
TZOO's strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
TZOO has an A grade for Quality and Sentiment and a B for Value. It is ranked #3 within the same industry.
Beyond what is stated above, we've also rated TZOO for Momentum, Growth, and Stability. Get all TZOO ratings here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
DESP shares were unchanged in premarket trading Wednesday. Year-to-date, DESP has declined -14.27%, versus a 3.95% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet's keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet's looks to help retail investors understand the underlying factors before making investment decisions.
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