The $30-billion internet software and services industry is highly competitive with companies like Google (GOOGL), eBay (EBAY) andYahoo! (YHOO) all formidable players. But the industry is growing.
Consumers are becoming more comfortable with using the Internet for purchasing goods or services. "Looking forward, companies' success will depend on their ability to adopt rapidly evolving technologies, alter services to meet industry standards, and improve the performance and reliability of services," according to TheStreet Ratings. "Investment in research and development will continue to be an integral part of company and industry success."
Still, the industry is rife with challenges. In the advertising segment, competition is particularly intense, "as a result of consolidation and low entry barriers, which has caused price reductions for advertising space, implying a drop in margins," TheStreet Ratings said. Another challenge the industry faces is the increasing uncertainty of security, particularly of personal information as hacking becomes more prevalent.
Incidentally, TheStreet Ratings had a "buy" rating on AOL in its latest report, dated May 10 -- just two days before Verizon announced it was acquiring the company. Here are nine other Internet companies you should buy now.
The stocks on this list are all large-cap companies in the "Internet Software & Services" industry, rated "buy" with a B or better rating. Find out which stocks to buy and when you're done, be sure to check out which broadcasting companies to add to your portfolio.
TheStreet Ratings, TheStreet's proprietary ratings tool, projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a "buy" yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a "buy" yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year. Note: Year-to-date returns are based on May 12, 2015 closing prices.
YHOO data by YCharts
YHOO data by YCharts
Yahoo! Inc. provides search and display advertising services on Yahoo properties and affiliate sites worldwide.
"We rate YAHOO INC (YHOO) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, reasonable valuation levels and solid stock price performance. We feel its strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- YHOO's revenue growth has slightly outpaced the industry average of 5.9%. Since the same quarter one year prior, revenues slightly increased by 8.2%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Although YHOO's debt-to-equity ratio of 0.04 is very low, it is currently higher than that of the industry average. Along with this, the company maintains a quick ratio of 4.44, which clearly demonstrates the ability to cover short-term cash needs.
- The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. Compared to other companies in the Internet Software & Services industry and the overall market, YAHOO INC's return on equity exceeds that of both the industry average and the S&P 500.
- Compared to its closing price of one year ago, YHOO's share price has jumped by 28.76%, exceeding the performance of the broader market during that same time frame. Turning to the future, naturally, any stock can fall in a major bear market. However, in almost any other environment, the stock should continue to move higher despite the fact that it has already enjoyed nice gains in the past year.
- You can view the full analysis from the report here: YHOO Ratings Report
Must Read: AOL Chief Tim Armstrong Has the Last Laugh With Verizon Deal
QIHU data by YCharts
QIHU data by YCharts
8. Qihoo 360 Technology Co. (QIHU) (ADR)
Market Cap: $7.2 billion
Rating: Buy, B
Year-to-date return: -1%
Market Cap: $7.2 billion
Rating: Buy, B
Year-to-date return: -1%
Qihoo 360 Technology Co. Ltd., through its subsidiaries, provides Internet services in the People's Republic of China. The company operates through Internet Services and Others segments.
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- QIHU's very impressive revenue growth greatly exceeded the industry average of 5.9%. Since the same quarter one year prior, revenues leaped by 94.6%. Growth in the company's revenue appears to have helped boost the earnings per share.
- QIHOO 360 TECHNOLGY CO -ADR reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, QIHOO 360 TECHNOLGY CO -ADR increased its bottom line by earning $1.71 versus $0.76 in the prior year. This year, the market expects an improvement in earnings ($3.48 versus $1.71).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Internet Software & Services industry. The net income increased by 361.4% when compared to the same quarter one year prior, rising from $16.65 million to $76.82 million.
- Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Internet Software & Services industry and the overall market, QIHOO 360 TECHNOLGY CO -ADR's return on equity exceeds that of both the industry average and the S&P 500.
- The gross profit margin for QIHOO 360 TECHNOLGY CO -ADR is currently very high, coming in at 81.90%. Despite the high profit margin, it has decreased significantly from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 17.81% trails the industry average.
- You can view the full analysis from the report here: QIHU Ratings Report
