Internet Stocks That Leave E-Commerce Giant Shopify (SHOP) Behind

The Internet-Services industry is well-positioned for solid growth thanks to the increased adoption of digital services post-pandemic. The rising Internet penetration is pushing companies to expand their digital offerings to meet the growing demand. With revolutionary technologies like 5G enabling faster connectivity, the need for internet services is expected to remain robust.

In this piece, I have discussed the reasons why fundamentally strong internet services stocks VeriSign, Inc. (VRSN), Perion Network Ltd. (PERI), and Liquidity Services, Inc. (LQDT) are leaving e-commerce giant Shopify Inc. (SHOP) behind.

The pandemic has dramatically changed how we use digital technology, affecting work, socializing, education, and shopping. Increasing investments in digital transformation initiatives will likely boost demand for internet services.

In 2023, Statista reports that internet access in the United States has grown to nearly 92%, up from 77% in 2022, making the U.S. one of the world's largest online markets, with almost 299 million users last year.

Moreover, at the start of the third quarter in 2023, approximately 5.19 billion people worldwide had internet access, constituting 64.4% of the global population. Additionally, it is anticipated that global 5G connections will surpass 1.90 billion by the end of the year, with projections indicating approximately 6.80 billion 5G connections by the close of 2027.

E-commerce giant SHOP reported higher-than-expected earnings and revenue in the second quarter. The company achieved strong results from new signups and price increases in its services this year. Its EPS was 181.1% higher than analyst estimates, while its revenue beat the consensus estimate by 4.3%.

The company recently sold its delivery and logistics business to Flexport and reduced its workforce by 20% to cut costs. For the third quarter, the company has forecasted its revenue to grow at a low-twenties percentage rate on a year-over-year basis.

SHOP expects the gross margin percentage to be two or three percentage points higher than the second-quarter gross margin of 49.3%. Its capital expenditures for the entire year are expected to be $45 million.

SHOP currently trades at an expensive valuation. SHOP’s forward non-GAAP P/E of 104.33x is 373.2% higher than the industry average of 22.05x. Its forward EV/EBIT of 117.08x is 555.1% higher than the industry average of 17.87x.

SHOP’s stock performance has been mixed. It has declined 16% in price over the past three months but gained 86.3% over the past year to close the last trading session at $53.58. Despite SHOP's strong momentum, the company faces tough competition from its peers. Additionally, the uncertain macroeconomic outlook may hinder its long-term prospects.

Considering the uncertainty surrounding SHOP’s prospects, investors could look at VRSN, PERI, and LQDT. Now, let's analyze the fundamentals of these three Internet – Services stocks, starting with the third choice.

Stock #3: VeriSign, Inc. (VRSN)

VRSN provides domain name registry services and internet infrastructure that enables internet navigation for various recognized domain names. The company ensures the security and stability, and resiliency of internet infrastructure and services.

In terms of the trailing-12-month EBIT margin, VRSN’s 66.48% is significantly higher than the 4.51% industry average. Its 49.10% trailing-12-month levered FCF margin is 581.5% higher than the 7.20% industry average. Likewise, its 0.85x trailing-12-month asset turnover ratio is 37.9% higher than the industry average of 0.62x.

VRSN’s revenues for the second quarter ended June 30, 2023, increased 5.7% year-over-year to $372 million. The company’s net income rose 11% over the prior-year quarter to $185.70 million. In addition, its EPS came in at $1.79, representing an increase of 16.2% year-over-year.

Analysts expect VRSN’s EPS and revenue for the quarter ending September 30, 2023, to increase 14.4% and 6.2% year-over-year to $1.81 and $379.16 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 15.7% to close the last trading session at $200.94.

VRSN’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.

It has an A grade for Quality and a B for Stability and Sentiment. Within the Internet – Services industry, it is ranked #7 out of 28 stocks. To see VRSN’s Growth, Value, and Momentum ratings, click here.

Stock #2: Perion Network Ltd. (PERI)

Headquartered in Holon, Israel, PERI provides digital advertising solutions to brands, agencies, and publishers in North America, Europe, and internationally. It provides Wildfire, a content monetization platform; search monetization solutions, including website monetization, search mediation, and app monetization; and cross-channel digital advertising software as a service platform.

On September 6, 2023, PERI announced that SORT, their AI technology, won 'Best Cookieless Identification Technology' at the 2023 Digiday Technology Awards for its role in a highly successful digital campaign for Mercedes-Benz USA, achieving a 70% increase in brand interactions while upholding strict privacy standards.

In terms of the trailing-12-month EBIT margin, PERI’s 18.20% is 114.1% higher than the 8.50% industry average. Likewise, its 15.82% trailing-12-month net income margin is 338.9% higher than the industry average of 3.60%. Furthermore, the stock’s 12.11% trailing-12-month Return on Total Assets is 683.7% higher than the industry average of 1.55%.

PERI’s total revenues for the second quarter ended June 30, 2023, increased 21.7% year-over-year to $178.50 million. Its non-GAAP net income increased 71.8% year-over-year to $42.10 million. Its adjusted EBITDA rose 44.6% year-over-year to $41.2 million. Also, its non-GAAP EPS came in at $0.84, representing an increase of 64.7% year-over-year.

Street expects PERI’s EPS and revenue for the quarter ending September 30, 2023, to increase 18.9% and 16.2% year-over-year to $0.63 and $184.31 million, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 52.3% to close the last trading session at $30.12.

PERI’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.

It has a B grade for Value and Quality. It is ranked #3 in the same industry. To see PERI’s Growth, Momentum, Stability, and Sentiment ratings, click here.

Stock #1: Liquidity Services, Inc. (LQDT)

LQDT provides e-commerce marketplaces, self-directed auction listing tools, and value-added services in the United States and internationally. It operates through four segments: GovDeals, Retail Supply Chain Group (RSCG), Capital Assets Group (CAG), and Machinio.

On September 16, 2023, LQDT announced the auction of more than 150 surplus energy assets in Alberta, Canada, on behalf of a major oil and gas industry partner.

On August 14, 2023, LQDT's GovDeals announced the achievement of $4 billion in total auction sales, showcasing its dedication to sustainable business practices and transparent surplus sales. This milestone underscores its two-decade-long growth in facilitating transactions between surplus asset buyers and sellers in North America.

In terms of the trailing-12-month gross profit margin, LQDT's 54.45% is 79.7% higher than the 30.30% industry average. Likewise, its 7.44% net income margin is 19.8% higher than the 6.21% industry average. Additionally, the stock’s 8.14% trailing-12-month Return on Total Assets is 61.3% higher than the industry average of 5.05%.

LQDT's total revenue for the third quarter ended June 30, 2023, increased 15.6% year-over-year to $80.77 million. Its non-GAAP net income rose 24.8% year-over-year to $8.81 million. The company’s adjusted EBITDA rose 12.4% year-over-year to $13.33 million. In addition, its non-GAAP EPS came in at $0.28, representing an increase of 33.3% year-over-year.

For the quarter ending September 30, 2023, LQDT's EPS and revenue, are expected to increase 26.3% and 10% year-over-year to $0.24 and $82.74 million, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past six months, the stock has gained 37.5% to close the last trading session at $17.39.

LQDT's POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system.

It is ranked first in the Internet – Services industry. It has an A grade for Quality and a B for Sentiment. Click here to see LQDT's Growth, Value, Momentum, and Stability ratings.

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VRSN shares were trading at $200.01 per share on Tuesday morning, down $0.93 (-0.46%). Year-to-date, VRSN has declined -2.64%, versus a 12.91% rise in the benchmark S&P 500 index during the same period.

Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.

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