The internet industry is poised for substantial growth and expansion in the foreseeable years, driven by increased internet penetration worldwide and the growing digitalization of business processes. In this piece, I have evaluated two internet stocks, eBay Inc. (EBAY) and Chegg, Inc. (CHGG), to determine which could generate better returns.
As global digitalization accelerates, businesses and consumers increasingly rely on fast and consistent internet connections for information, education, communication, and entertainment. As of 2023, internet users make up 64.4% of the global population, with 5.16 billion active users across the globe.
In addition, demand for high-speed internet is fueled by the growing integration of digital technology into all business areas. Digital transformation helps enterprises save costs by reducing manual labor, streamlining processes, and enhancing productivity. Businesses globally increasingly use cloud-based infrastructure, AI, VR&AR, and IoT, among other cutting-edge technologies.
According to a report by ReportLinker, the global wireless internet services market is estimated to grow at a 7% CAGR, reaching $921.97 billion by 2027.
The rollout of 5G technology, which offers faster internet speeds and improved connectivity, further boosts the internet industry’s expansion. As per a report by Market Research Future, the 5G service market is expected to reach $248.10 billion by 2032, growing at a CAGR of 29.4%. The internet industry’s tailwinds should bode well for EBAY and CHGG.
In terms of price performance, EBAY is a winner with marginal gains over the past three months compared to CHGG’s 46.6% decline. Moreover, EBAY has gained 12.8% over the past nine months, while CHGG plummeted 60.7%. Also, EBAY has gained 5.7% year-to-date compared to CHGG’s 65.7% decline.
But which stock is a better buy now? Let’s find out.
Recent Developments
On June 1, EBAY announced that it had expanded its Authenticity Guarantee to streetwear, making it the sixth category to receive the service. This move is expected to reinforce consumer trust, enhance EBAY's reputation, and strengthen its market position by ensuring authenticated products across a broader range of high-demand items.
On April 17, CHGG unveiled CheggMate, a new AI-enhanced learning service created with OpenAI’s most advanced model, GPT-4. By integrating it with CHGG’s learning platform and proprietary data, CheggMate can significantly strengthen CHGG’s competitive edge, draw in more students, and increase engagement for the company.
Recent Financial Results
For the first quarter that ended March 31, 2023, EBAY’s net revenues increased 1.1% year-over-year to $2.51 billion. Its gross profit grew 1% from the year-ago value to $1.81 billion. Also, the company’s income from continuing operations came in at $569 million, compared to a loss of $1.34 billion in the prior year’s period.
Furthermore, EBAY’s non-GAAP net income from continuing operations per share stood at $1.11, registering a 5.7% year-over-year improvement.
For the first quarter that ended March 31, 2023, CHGG’s adjusted EBITDA decreased 7.4% year-over-year to $57.56 million. Its non-GAAP net income and non-GAAP EPS declined 23.9% and 15.6% from the prior-year period to $38.10 million and $0.27, respectively. However, the company’s free cash flow rose 13.6% year-over-year to $55.99 million.
Past And Expected Financial Performance
Over the past three years, EBAY’s revenue grew at a 6.9% CAGR. Moreover, the company’s EBITDA and normalized net income increased at CAGRs of 4.1% and 9.1%, respectively. Moreover, the company’s total assets rose at a 1.9% CAGR during the same period.
Analysts expect EBAY’s revenue to increase 2.7% year-over-year to $10.06 billion for the fiscal year ending December 2023. The company’s EPS for the same year is expected to grow 2.5% year-over-year to $4.21. In addition, the company topped the consensus revenue and EPS estimates in all four trailing quarters, which is impressive.
CHGG’s revenue increased at a CAGR of 19.1% over the past three years. Its EBITDA and total assets grew at CAGRs of 19.1% and 16.5%, respectively. However, the company’s EBIT declined at a CAGR of 40.2% over the same time frame.
CHGG’s revenue for the fiscal year (ending December 2023) is expected to decline 8.3% year-over-year to $702.98 million. Analysts expect the company’s EPS for the ongoing year to decline 15.6% year-over-year to $1.10. However, the company surpassed its consensus revenue estimates in all of the trailing four quarters.
Valuation
In terms of forward EV/EBITDA, EBAY is currently trading at 7.96x, 1% lower than CHGG, which is trading at 8.04x. However, CHGG’s forward non-GAAP PEG multiple of 0.54 is 59.4% lower than EBAY’s 1.33. Additionally, CHGG’s forward EV/Sales of 2.46x is 2.8% lower than EBAY’s 2.53x.
Profitability
EBAY’s trailing-12-month revenue is 752.25 times what CHGG generates. Moreover, EBAY is more profitable, with a trailing-12-month EBITDA margin of 28.22% compared to CHGG’s 13.33%. In addition, EBAY’s trailing-12-month levered FCF margin of 18.44% compares to CHGG’s 14.94%.
Furthermore, EBAY’s trailing-12-month ROTA and ROTC of 10.43% and 9.87% compare to CHGG’s 0.18% and 0.13%, respectively. Also, EBAY’s trailing-12-month cash from operations of $2.48 billion compares with CHGG’s $248.86 million.
POWR Ratings
EBAY has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. Conversely, CHGG has an overall rating of C, translating to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. EBAY has an A grade for Quality, justified by its higher-than-industry profitability. EBAY’s trailing-12-month gross profit margin and cash per share of 72.6% and $3.88 compare to the industry averages of 35.24% and $2.42, respectively.
On the other hand, CHGG has a C grade for Quality, consistent with its mixed profitability. CHGG has a trailing-12-month gross profit margin of 74.55%, which is 111.5% higher than the industry average of 35.24%. However, the stock’s trailing-12-month cash per share of $2.35 is 2.7% lower than the industry average of $2.42.
Also, EBAY has a B grade for Growth, in sync with its impressive growth record. In contrast, CHGG has a C grade for Growth, consistent with its mixed historical growth.
Of the 57 stocks in the Internet industry, EBAY is ranked #9, while CHGG is ranked #27.
Beyond what we’ve stated above, we have also rated both stocks for Value, Momentum, Stability, and Sentiment. Click here to view EBAY’s ratings. Get all CHGG ratings here.
The Winner
With rapid digitalization worldwide, businesses and consumers increasingly depend on reliable, high-speed internet connections. The advent of 5G technology, which provides enhanced connectivity and faster internet speeds, also catalyzes the internet industry’s expansion. Prominent internet stocks EBAY and CHGG are positioned to benefit from the industry’s promising growth prospects.
However, considering CHGG’s relatively weak financial performance, mixed profitability, and bleak growth outlook, its competitor, EBAY, could be a better buy now.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy or Buy. View all the top-rated stocks in the Internet industry here.
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EBAY shares were trading at $44.30 per share on Friday afternoon, up $0.45 (+1.03%). Year-to-date, EBAY has gained 8.05%, versus a 16.39% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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