2 Top-Ranked Stocks to Buy From a Challenging Internet Industry

The Zacks Internet - Content industry has been suffering from challenging macroeconomic conditions globally. Persistent inflation and higher interest rates are having a detrimental effect on ad spending, the primary revenue source for the industry participants. The ongoing war between Russia and Ukraine, as well as that in the Middle East, has been an overhang on the prospects of the industry participants. However, industry participants are benefiting from solid demand for digital offerings, as well as the increasing importance of video content and cloud-based applications. The proliferation of AI and the rapid deployment of Generative AI (Gen AI) are aiding industry players. Participants like RELX RELX and DHI Group DHX are expanding their presence across social media, display and connected TV, and search, driving top-line growth.

Industry Description

The Zacks Internet - Content industry comprises providers of video encoding platforms, personal services, Internet content and information, staffing and outsourcing services, publishing, capital markets, media-based, home service, digital insights and measurement, stock photo, video and music licensing, and online travel companies. The industry is witnessing a rapid change in consumer behavior and ongoing digitalization. Advertising is a major revenue source for industry participants. Therefore, these companies are trying to expand their digital presence to win customers. They are also expanding their presence across social media, display and connected TV and search. Apart from the United States, a number of companies in this industry are located in Israel, the U.K., Germany, Russia and China.
 

3 Trends Shaping the Future of the Internet - Content Industry

Demand for Digital Offerings Growing: The industry is characterized by rapid technological change, frequent product and service introductions, and evolving standards. An expanding range of mobile, digital and cloud-based offerings by industry participants is a major growth driver. The proliferation of smart devices and the increasing automation of the application development process bode well.

Industry Prospects Driven by Ad Spending Rate: Industry participants are focusing on marketing efforts to boost traffic to websites. Advertising and subscriptions are major revenue sources for these companies. Also, the industry is dependent on consumer spending trends, making holiday spending a major deciding factor. However, macroeconomic challenges, persistent inflation and higher interest rates are expected to hurt ad spending in the near term.

Increasing Regulations Mar Prospects: Industry participants involved in online search and other social networking activities are increasingly facing regulatory pressure, particularly in China and the European Union (“EU”). The China government has a number of regulations related to direct advertising, which is a prime revenue source for these companies. The implementation of the General Data Protection Regulation, which took effect on May 25, 2018, in the EU, adds to the concerns. Enactment of the Digital Markets Act (DMA) in the EU aims to prevent large online platforms that connect users with content, goods, information and services from abusing their market power. The DMA adds to the headwinds faced by Internet content providers in the EU.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Internet - Content industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #203, which places it in the bottom 17% of more than 250 Zacks industries.

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

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Since May 31, 2024, the Zacks Consensus Estimate for the industry’s 2025 earnings has moved down 3.4%.

Given the dull industry outlook, there are only a few stocks worth buying. But before we present the stocks that you may want to consider for your portfolio, let us take a look at the industry’s recent stock market performance and valuation.

Industry Outperforms S&P & Sector

The Zacks Internet - Content industry has outperformed the broader Zacks Computer and Technology sector, as well as the S&P 500 composite over the past year.

The industry has returned 20.9% over this period compared with the 10% growth of the S&P 500 and the 8% rise of the broader sector.

One-Year Price Performance

 

Industry's Current Valuation

On the basis of the trailing 12-month price-to-sales ratio (P/S), which is a commonly used multiple for valuing Internet – Content stocks, we see that the industry is currently trading at 6.92X compared with the S&P 500’s 5.29X and the sector’s 7.14X. 

Over the last five years, the industry has traded as high as 6.92X and as low as 5.71X, the median being 6.28X, as the charts below show.

Trailing 12-Month Price-to-Sales (P/S) Ratio

 

 

 

2 Internet Stocks to Buy

RELX: This Zacks Rank #2 (Buy) company is benefiting from strong demand for Financial Crime Compliance, and Digital Fraud and Identity Solutions. Protégé — RELX’s recently launched next-generation Gen AI legal assistant — has been gaining traction. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

RELX’s strategy of frequent acquisitions is noteworthy. In fourth-quarter 2024, the company bought five small companies for £195 million, the most significant of which was the Henchman technology business in the legal domain. In December 2024, RELX acquired IDVerse, an ID document verification platform for Business Services and Risk.

The Zacks Consensus Estimate for RELX’s 2025 earnings has increased a couple of cents to $1.72 per share over the past 30 days. RELX shares have appreciated 21.1% year to date.

Price & Consensus: RELX

 

DHI Group: Another Zacks Rank #2 stock, DHX is benefiting from improved offerings, cost savings from restructurings and strong sales and marketing teams. ClearanceJobs’ improving profitability and growing market share are noteworthy. However, Dice faces a challenging macroeconomic environment that is expected to hurt results until tech hiring demand normalizes. 

AI continues to generate increasing demand for tech professionals, with major firms like IBM and McKinsey leading early-stage AI projects. IBM secured $5 billion in AI-related business, and McKinsey forecasts that 45% of its projects will focus on AI this year. This indicates broader corporate AI adoption that bodes well for both ClearanceJobs and Dice. 

The Zacks Consensus Estimate for DHX’s 2025 earnings has increased by 4 cents to 15 cents per share over the past 30 days. DHI Group shares have appreciated 12.5% in the year-to-date period.

Price & Consensus: DHX

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This article originally published on Zacks Investment Research (zacks.com).

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