Outlook for Internet Delivery Services Industry Appears Bright

The Zacks Internet - Delivery Services industry primarily comprises companies that offer services via Internet-based platforms. These offerings include food delivery, online travel booking, direct marketing and media services, plus web hosting among others.

Being growth-stage companies, the industry participants are spending more on R&D and sales & marketing, thereby making it difficult to generate profits in the near term.

Let’s take a look at the industry’s four major themes:

  • Internet is ubiquitous and the increasing usage of smartphones is changing the delivery landscape.  The companies in this industry are benefiting from the growing number of Internet users, coupled with improvement in Internet penetration and the rapid adoption of 4G Volte technology. The emergence of 5G technology, which promises a fast progress in speed and deliverability, bodes well for this industry.
  • Shift in consumer preferences, driven by convenience and easy accessibility, is anticipated to aid the industry. Notably, the robust transition from offline to online food ordering, and the rising penetration of online travel booking augurs well for the industry players. However, as higher consumer spending appetite is the main driver of the overall industry’s health, any sluggishness in the global economy will pose a risk.
  • Online delivery is yet to expand beyond the major metros, reflecting lower penetration and a significant room for growth. However, as expansion into the new markets will take some time to generate volumes, higher upfront costs are likely to hurt profitability. Moreover, Amazon’s (AMZN) focus on strengthening its delivery system poses a key challenge to the industry players. We believe, the company’s powerful distribution channels are a major forte that might massively threaten the incumbents in this industry. Also, search giant Alphabet (GOOGL) forayed into the food delivery market, with its delivery arm Wing and an array of food delivery apps, which are likely to further intensify competition.
  • The industry’s near-term prospect looks gloomy due to the coronavirus-induced global lockdown. There is travel ban in most countries, which is hurting online travel and hotel booking companies. Moreover, online food delivery companies have been hit as restaurant suppliers have been ordered to shut their operations. Also, as people are staying indoors, they now have more time to cook for themselves, thereby lesser requirements for outside food. Nonetheless, online travel and hotel booking as well as online food delivery companies are poised to bounce back once normalcy resumes.

Zacks Industry Rank Indicates Bright Prospects

The Internet - Delivery Services industry is housed within the broader Computer and Technology sector. It carries a Zacks Industry Rank #38, which places it at the top 15% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Underperforms S&P 500 and Sector

The Internet — Delivery Services industry has underperformed both the S&P 500 composite and the broader sector in the past year.

The industry has depreciated 5.6% in this period compared with the S&P 500 composite’s decline of 2.9% and as against the broader sector’s increase of 2%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-sales ratio (P/S), a commonly used multiple for valuing the Internet delivery stocks, the industry is currently trading at 1X compared with the S&P 500’s 3.23X and the sector’s 3.41X.

Over the past five years, the industry has traded as high as 1.89X, as low as 0.77X and recorded a median of 1.01X as the charts below show.

Price-to-Sales Ratio (Past 5 Years)

Bottom Line

Higher Internet presence in the emerging markets, a burgeoning affluent middle class and the accelerated uptake of smartphones will help the participants in the Internet – Delivery Services industry.

However, steep marketing expenses due to the planned expansion into new delivery markets will be a persistent overhang on the margins in the near term. Also, the coronavirus-induced global lockdown is likely to hurt internet delivery companies in the days to come.

Currently, there are only two buy-rated stocks in the Internet — Delivery industry carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Guangzhou-based Vipshop Holdings Limited (VIPS) is an online discount retailer of various brands in the People's Republic of China. The company offers apparels for men and women, shoes for casual and formal occasions and accessories for both women and men. The Zacks Consensus Estimate for ongoing-year earnings moved up 9 cents over the past 60 days. The stock outpaced the Zacks Consensus Estimate in the preceding four quarters, the average positive beat being 32.5%.

Price and Consensus: VIPS

Bitauto Holdings Limited (BITA) is engaged in providing Internet content and marketing services for the automotive industry in China. The Zacks Consensus Estimate for current-year earnings moved 11 cents south over the past 60 days. In the trailing four quarters, the stock has missed the Zacks Consensus Estimate on three occasions and surpassed in the other, the average negative surprise being 135.9%.

Price and Consensus: BITA

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Vipshop Holdings Limited (VIPS): Free Stock Analysis Report
Alphabet Inc. (GOOGL): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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