The Internet industry is poised for substantial growth and expansion in the coming years, driven by increased Internet penetration worldwide and increasing digitization of business processes. In this piece, I evaluated two internet stocks, eBay Inc. (eBay) and Chegg, Inc. (CHGG), to determine which might 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 peace 64.4% of the world populationwith 5.16 billion active users worldwide.
Additionally, the demand for high-speed Internet is fueled by the growing integration of digital technology into all areas of business. Digital transformation helps companies save costs by reducing manual work, streamlining processes and improving productivity. Businesses around the world are increasingly using cloud-based infrastructure, AI, VR&AR, and IoT, among other cutting-edge technologies.
According to a report by ReportLinker, the global market for wireless Internet services is estimated to be grow at a CAGR of 7%.reaching $921.97 billion by 2027.
The rollout of 5G technology, which offers faster internet speeds and better connectivity, further stimulates the expansion of the internet industry. According to a report by Market Research Future, the 5G services market is expected to reach $248.10 billion by 2032, with growth a CAGR of 29.4%. Tailwinds from the Internet sector 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. Additionally, EBAY has gained 12.8% over the past nine months, while CHGG has plunged 60.7%. Additionally, EBAY 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 extended its guarantee of authenticity to streetwear, making it the sixth category to receive the service. This move is expected to boost consumer confidence, improve EBAY’s reputation and strengthen its market position by ensuring authenticated products across a wider range of high-demand items.
On April 17, CHGG unveiled CheggMate, a new AI-powered learning service built on 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 advantage, attract more students, and increase engagement for the company.
Recent financial results
For the first quarter ended March 31, 2023, EBAY’s net revenues increased 1.1% year over year to $2.51 billion. Its gross profit grew 1% from a year-ago value to $1.81 billion. In addition, the company’s income from continuing operations was $569 million, compared with a loss of $1.34 billion in the prior years period.
In addition, EBAY’s non-GAAP net income from continuing operations per share was $1.11, an improvement of 5.7% year over year.
For the first quarter ended March 31, 2023, CHGGs Adjusted EBITDA decreased 7.4% year over year to $57.56 million. Non-GAAP net income and non-GAAP EPS decreased 23.9% and 15.6% over the year-ago period, to $38.10 million and $0.27, respectively. However, the company’s free cash flow increased 13.6% year over year to $55.99 million.
Past and expected financial performance
Over the past three years, EBAY’s revenue has grown at a CAGR of 6.9%. Additionally, the company’s EBITDA and normalized net income increased at CAGRs of 4.1% and 9.1%, respectively. In addition, the company’s total assets increased at a CAGR of 1.9% over the same period.
Analysts expect EBAY’s revenue to grow 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. Additionally, the company topped consensus revenue and EPS estimates in all four trailing quarters, which is impressive.
CHGG’s revenues have grown at a CAGR of 19.1% over the past three years. EBITDA and total assets grew at CAGR of 19.1% and 16.5% respectively. However, the company’s EBIT declined at a CAGR of 40.2% over the same time period.
CHGG’s revenue for the fiscal year (ending December 2023) is expected to decrease 8.3% year over year to $702.98 million. Analysts expect the company’s full-year EPS to decline 15.6% year over year to $1.10. However, the company topped consensus estimates for revenue in all of the previous four quarters.
Assessment
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 non-GAAP PEG forward multiple of 0.54 is 59.4% lower than EBAY’s 1.33. Additionally, CHGG’s EV/Forward Sales of 2.46x is 2.8% lower than EBAY’s 2.53x.
Profitability
EBAY’s last 12 months revenue is 752.25 times that generated by CHGG. Additionally, EBAY is more profitable, with a 12-month EBITDA margin of 28.22% compared to CHGG’s 13.33%. In addition, EBAY’s last 12-month leveraged FCF margin is 18.44% versus CHGG’s 14.94%.
Additionally, EBAY’s trailing 12-month ROTA and ROTC of 10.43% and 9.87% compare to CHGG of 0.18% and 0.13%, respectively. Also, EBAY’s $2.48 billion in year-end cash compared to CHGG’s $248.86 million.
POWR ratings
EBAY has an overall rating of B, which equates to Buy Our Property POWR ratings system. Conversely, CHGG has an overall rating of C, which translates to Neutral. POWR ratings are calculated considering 118 different factors, with each factor weighted to an optimal level.
Our proprietary rating system also rates each stock based on eight distinct categories. EBAY has an A grade for quality, justified by its profitability above that of the industry. EBAY’s 12-month gross profit margin and cash per share of 72.6% and $3.88 compare to 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 12-month gross profit margin of 74.55%, which is 111.5% higher than the industry average of 35.24%. However, cash per share of $2.35 over the past 12 months is 2.7% lower than the industry average of $2.42.
Additionally, EBAY has a B-grade for growth, in sync with its impressive growth record. Conversely, CHGG has a C grade for Growth, consistent with its historical mixed growth.
Of the 57 titles in Internet sector, EBAY ranks 9th, while CHGG ranks 27th.
In addition to the above, we also rated both stocks for Value, Momentum, Stability and Sentiment. Click here to view EBAY ratings. Get all CHGG ratings Here.
The winner
With rapid digitalization around the world, businesses and consumers increasingly depend on reliable, high-speed Internet connections. The advent of 5G technology, which provides advanced connectivity and faster internet speeds, is also a catalyst for the expansion of the internet industry. Leading internet stocks EBAY and CHGG are positioned to benefit from the sector’s promising growth prospects.
However, considering CHGG’s relatively weak financial performance, mixed profitability and bleak growth outlook, its competitor, EBAY, may be a better buy now.
Our research shows that your odds of success increase when you invest 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 traded at $44.30 a share on Friday afternoon, up $0.45 or 1.03%. Year-to-date, EBAY has gained 8.05%, compared with a 16.39% increase in the benchmark S&P 500 over the same period.
About the author: Aanchal Sugandh
Aanchal’s passion for the financial markets drives his work as an investment analyst and journalist. He has a bachelor’s degree in finance and is pursuing the CFA program. He is adept at assessing the long-term prospects of stocks with his fundamental analysis skills. His goal is to help investors build portfolios with sustainable returns. Moreover…
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