The internet industry's promising future is underpinned by rising online engagement, escalating demand for digital services, and the evolution of 5G technology. In this context, this article compares the fundamentals of two internet stocks, Yelp Inc. (YELP) and Carvana Co. (CVNA), to assess which stock is better suited for your 2024 portfolio.
But before we dive deeper into the fundamentals of the featured stocks, let’s briefly examine the industry dynamics first.
The internet industry has experienced remarkable growth in recent years, and its expansion shows no signs of slowing down. By 2023, the global count of active internet users exceeded 5.30 billion, constituting 65.4% of the world's population, highlighting widespread internet adoption. This figure is expected to continue its upward trajectory, reaching an estimated 6.54 billion by 2025.
As reliance on online services for communication, commerce, entertainment, and various other purposes continues to grow, the internet's indispensable role in modern society becomes increasingly apparent. The global internet service market is projected to hit a remarkable $733.79 billion by 2031, exhibiting a 4.4% CAGR from 2023 to 2031.
Furthermore, the internet industry's prospects are significantly bolstered by the widespread integration of 5G technology, which promises enhanced connectivity with faster speeds and heightened reliability. Projections indicate that global 5G subscriptions will exceed 5.30 billion by 2029, representing a substantial 58% of all mobile subscriptions.
The aforementioned date underscores the escalating demand and widespread acceptance of this cutting-edge technology on a global scale, emphasizing its pivotal role in shaping the future landscape of internet connectivity and digital innovation.
Given the solid industry outlook, both YELP and CVNA should reap the benefits. In terms of price performance, YELP’s shares have surged 60.5% over the past nine months to close the last trading session at $45. Meanwhile, CVNA’s shares have climbed 363.6% over the past nine months to close the last trading session at $52.39.
However, to determine which Internet stock could be the ideal buy, let’s dig deeper into their fundamentals:
Recent Developments
On January 30, 2024, YELP unveiled its Winter Product Release, introducing over 20 new features designed to enhance the YELP experience for consumers and business owners alike. These include AI-powered business summaries for easier browsing, recognitions to highlight passionate reviewers, and an updated visual home feed and search experience for improved discovery.
Conversely, On February 7, 2024, CVNA unveiled its extension of same-day vehicle delivery services to Oklahoma City. This expansion means that certain residents in the Oklahoma City area can receive their ordered vehicle within hours of placing an order on CVNA’s website. Additionally, select customers looking to sell their current vehicles to CVNA can take advantage of same-day drop-off at designated locations across the state.
Recent Financial Results
For the fiscal third quarter, which ended on September 30, 2023, YELP’s net revenue increased 11.7% year-over-year to $345.12 million, while its adjusted EBITDA improved 30.5% from the year-ago value to $96.47 million.
The company’s attributable net income and EPS rose 539.2% and 507.7% from the prior-year quarter to $58.22 million and $0.79, respectively. Moreover, during the same quarter, its total current assets stood at $625.94 million, up 5% compared to $595.99 million as of December 31, 2022.
In the fiscal third quarter, which ended on September 30, 2023, CVNA’s net sales and operating revenues declined 18.1% from the year-ago value to $2.77 billion, while its net income and EPS came in at $741 million and $3.60, respectively. During the same period, the company’s total current assets stood at $3.19 billion, down 30.7% compared to $4.59 billion as of December 31, 2022.
Past and Expected Financial Performance
YELP’s revenue has grown at CAGRs of 12.8% and 7.3% over the past three and five years, respectively. Analysts predict YELP’s revenue and EPS for the fiscal fourth quarter (ended December 2023) to increase 10.4% and 21.7% year-over-year to $341.17 million and $0.84, respectively.
Conversely, CVNA’s revenue has improved at CAGRs of 32% and 46.9% over the past three and five years, respectively. Street expects CVNA’s revenue for the fiscal fourth quarter (ended December 2023) to decline 9.9% year-over-year to $2.56 billion. While its consensus EPS estimate for the same quarter stands at a negative $0.92.
Profitability
YELP’s trailing-12-month gross profit margin of 91.33% is higher than CVNA’s 13.55%. Likewise, YELP’s trailing-12-month levered FCF margin of 19.78% is higher than CVNA’s 7.37%. Furthermore, YELP’s trailing-12-month Return On Total Assets (ROTA) of 8.95% compares to CVNA’s negative 3.44%.
Thus, YELP is more profitable.
Valuation
In terms of the forward P/E ratio, CVNA’s 218.97x is 586.9% higher than YELP’s 31.88x. Furthermore, CVNA’s forward EV/EBITDA multiple of 30.57 is 268.8% higher than YELP’s 8.29.
Thus, YELP is more affordable.
POWR Ratings
YELP has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system. Conversely, CVNA has an overall rating of D, translating to a Sell. 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. YELP has a B grade for Value, in sync with its discounted valuation metrics. In terms of the forward non-GAAP PEG, YELP’s 0.48x is 69.5% lower than the industry average of 1.56x. Similarly, the stock’s forward EV/EBITDA ratio of 8.29x is 3.1% lower than the 8.56x industry average.
On the other hand, CVNA C’s grade for Value is justified by its mixed valuation metrics. In terms of the forward P/E ratio, CVNA’s 218.97x is significantly higher than the industry average of 16.50x. However, CVNA’s forward EV/Sales ratio of 0.94x is 23.7% lower than the 1.23x industry average.
Moreover, YELP has a C grade for Stability, justified by its 24-month beta of 1.04. Whereas CVNA has a D grade for Stability in sync with a 24-month beta of 4.50.
Furthermore, YELP’s A grade for Quality is in sync with its higher-than-industry profitability. Its trailing-12-month gross profit margin of 91.33% is 85.8% higher than the industry average of 49.19%. Also, the stock’s trailing-12-month cash per share of $4.42 is 193.8% higher than the $1.51 industry average.
Conversely, CVNA’s C grade for Quality can be justified by its mixed profitability metrics. CVNA’s trailing-12-month gross profit margin of 13.55% is 61.9% lower than the industry average of 35.56%. However, the stock’s trailing-12-month cash per share of $4.77 is 101.2% higher than the $2.37 industry average.
Among the 54 stocks in the Internet industry, YELP is ranked #1, while CVNA is ranked #48.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, and Sentiment. Click here to view YELP ratings. Get all CVNA ratings here.
The Winner
With the increasing dependence on online services and advancements in 5G technology, companies like YELP and CVNA stand to gain. However, YELP's stronger financial standing, greater profitability, positive analyst projections, and more attractive valuation make it a preferable investment option compared to CVNA.
Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Internet industry here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
CVNA shares were trading at $50.81 per share on Friday afternoon, down $1.58 (-3.02%). Year-to-date, CVNA has declined -4.02%, versus a 5.12% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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