By breaking down physical barriers, consumer internet businesses are reshaping how people shop, connect, learn, and play. Luckily for them, the market seems to believe there is a long runway for growth as the industry has recorded a 42.6% gain over the past six months, beating the S&P 500 by 31.3 percentage points.
Nevertheless, investors should tread carefully as many internet companies pursue winner-take-all strategies, meaning losses can be hefty if their playbooks don’t pan out. Keeping that in mind, here are two internet stocks we think can generate sustainable market-beating returns and one we’re passing on.
Market Cap: $12.31 billion
Spun out from Netflix, Roku (NASDAQ: ROKU) makes hardware players that offer access to various online streaming TV services.
Why Does ROKU Worry Us?
Focus on expanding its platform came at the expense of monetization as its average revenue per user fell by 2.6% annually
Efficiency fell over the last four years as its EBITDA margin declined by 13.4 percentage points because it pursued growth instead of profits
Earnings per share fell by 31.2% annually over the last three years while its revenue grew, showing its incremental sales were much less profitable
Roku’s stock price of $82.77 implies a valuation ratio of 53.7x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than ROKU.
Market Cap: $439.4 billion
Launched by Reed Hastings as a DVD mail rental company until its famous pivot to streaming in 2007, Netflix (NASDAQ: NFLX) is a pioneering streaming content platform.
Why Will NFLX Beat the Market?
Global Streaming Paid Memberships have grown by 12.4% annually, allowing for more profitable cross-selling opportunities if it can build complementary products and features
Disciplined cost controls and effective management resulted in a strong two-year EBITDA margin of 25.7%, and it turbocharged its profits by achieving some fixed cost leverage
Free cash flow margin grew by 18.2 percentage points over the last four years, giving the company more chips to play with
At $1,028 per share, Netflix trades at 34.6x forward EV-to-EBITDA. Is now the time to initiate a position? Find out in our full research report, it’s free.
Market Cap: $17.51 billion
Founded by a Carnegie Mellon computer science professor and his Ph.D. student, Duolingo (NASDAQ:DUOL) is a mobile app helping people learn new languages.
Why Is DUOL a Top Pick?
Monthly Active Users are rising, giving it the chance to increase revenue without incurring additional customer acquisition costs if it can cross-sell additional products and features
Incremental sales significantly boosted profitability as its annual earnings per share growth of 127% over the last three years outstripped its revenue performance
DUOL is a free cash flow machine with the flexibility to invest in growth initiatives or return capital to shareholders, and its recently improved profitability means it has even more resources to invest or distribute
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