Markets

Internet Stocks: What Glitters Is Not Always Gold

The 19-company strong Internet Software & Services industry is hot, heating up along with a number of sister Internet industries. Entering November 2019, I see this Info Tech sector grouping ranked at #17 out of 253 (Top 6%) industries that Zacks constructs. It was #68 (Top 27%) a week ago. I noted four positive earnings estimate revisions last week and only one negative revision. This is a backbone industry group for the Internet or worldwide web.
  • A sister group of 30 companies is Zacks Internet Commerce. It is hot, too, at #57. A good company example here is Zacks #2 Ranked travel advisor TripAdvisor.
  • A huge 91 company strong Zacks industry group is Internet Software. It is hot at #61. A good Zacks #1 Rank example here is online payments processor Square.
Since 2015, sexy growth stocks like these have enjoyed the lion’s share of price momentum. That has left many Internet stocks with rich share price valuations. Hence, these are “buyer beware” goods on the stock picking shelf. The worry you should well and truly have? The long-time institutional owners of high-priced growth stocks in these tech spaces start to cash in at multi-year highs. Before the glitter wears off. Their most recent share price slump is palpable. You will note this on the two USA names I share below. Taking big profits out of these high-flying stocks has likely been happening the last few months of 2019. I write up the top three largest market cap stocks in the space, with solid Zacks Ranks— The first stock (at $283 a share) is a major diversified Internet tech player in Mainland China. It is a kind of one stop shop for all things Internet related there. The final two picks provide critical software and Internet enabling. The latter two companies are key backbone players in the USA. These two businesses offer huge 50% profit margins. They too are very expensive stocks, at $190 and $107 a share, respectively. (1) NetEase (NTES ): This is a Zacks #1 Rank (STRONG BUY) and a $36.0B market-cap company. The stock trades at $283 a share, having pulled back from a $350 a share high in early 2018 to a $200 a share low in mid-2018. The forward P/E is high at 25.3. I see a Zacks Value score of C and a Zacks Growth score of D. The net profit margin here is average at 11.9%. The average profit margin for S&P 500 companies is 11.4%. In 2020, they expect to make $11.12 a share and they plan for $13.39 a share in earnings for 2021. That comes to something around +14.6% in annual EPS growth. The last EPS surprise was an amazing +50.2%. The average of the last four EPS surprises is also outstanding, at +22.9%. But the earnings track record shows an unstable scene, with 4 quarterly misses over the last 4 years. The company reports earnings again on November 13th, 2019. NetEase, Inc. is an Internet technology company engaged in the development of applications, services and other technologies for the Internet in China. It provides online gaming services that include in-house developed massively multi-player online role-playing games and licensed titles. NetEase also provides online advertising, community services, entertainment content, free e-mail services and micro-blogging services. The company also offers wireless value-added services such as news and information content, matchmaking services, music and photos from the web that are sent over SMS, MMS, WAP, IVR and Color Ring-back Tone technologies. NetEase, Inc., formerly known as NetEase.com, Inc., is based in Beijing, the People's Republic of China. (2) Verisign (VRSN ): This is a Zacks #2 Rank (BUY) and a $22.5B market-cap company. The stock trades at $190 a share, having pulled back from $220 a share high a few months ago. The forward P/E is high at 36.3. I see a Zacks Value score of F, but a Zacks Growth score of B. The net profit margin here is a whopping 52.6%. The average profit margin for S&P 500 companies is 11.4%. The last EPS surprise was +3.8%. The average of the last four EPS surprises is +10.8%. Their stellar earnings track record shows only one miss on a quarterly earnings report over the last 4 years. The company reports earnings again on February 6th, 2020. Verisign is a global leader in domain names and Internet security. It enables Internet navigation for many of the world's most recognized domain names and provides protection for websites and enterprises around the world. Verisign ensures the security, stability and resiliency of key Internet infrastructure and services, including the .com and .net domains and two of the Internet's root servers, as well as performs the root-zone maintainer functions for the core of the Internet's Domain Name System (DNS). Its only reportable segment included Registry Services. This reported revenues of $1.21 billion in 2018. Registry Services operate the .com, .net, .cc, .tv, .gov, .jobs, .edu and .name domain name directories. With respect to the .com, .net and .name domains, the company has agreements with The Internet Corporation for Assigned Names and Numbers (ICANN) that makes it the exclusive registrar of these domain names. Verisign's Security Services includes intelligence-driven Distributed Denial of Service Protection, iDefense Security Intelligence and Managed DNS. It is based in Reston, VA. (3) Okta (OKTA ): This is a Zacks #2 Rank (BUY) and a $12.5B market-cap company. The stock trades at $107 a share, having pulled back from $140 a share high in mid-2019. The forward P/E is not available, since they do not make a profit. I see a Zacks Value score of F and a Zacks Growth score of C. Again, the net profit margin here is a whopper at 52.6%. The average profit margin for S&P 500 companies is 11.4%. However, across 2020 or 2021, this software company is not looking to make a profit. Taking that as a backdrop, the last EPS surprise was +50.0%. They continue to work to improve the business model’s performance. The average of the last four EPS surprises show +43.3%. The earnings track record shows 9 out of 10 quarterly EPS beats. Again, that’s just learning to lose less money! The company reports earnings again on December 4th, 2019. Okta, Inc. is a provider of identity for the enterprise. The company's product consists of Okta information technology Products and Okta for Developers. Okta IT Products include:
  • Single Sign-On
  • Mobility Management
  • Adaptive Multi-Factor Authentication
  • Lifecycle Management and
  • Universal Directory
Okta for Developers include Complete Authentication, User Management, Application Programming Interface Access Management and Developer Tools.

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