The internet is constantly reshaping human relationships, orchestrating logistical dynamics, and disseminating knowledge. As of 2023, 5.18 billion people are engaged in the virtual realm, indicating that almost two-thirds of the world's population is connected to the domain of the World Wide Web.

Given the industry's significant potential, I assessed two prominent internet stocks, Meta Platforms, Inc. (META) and Zillow Group, Inc. (Z), to determine which has the potential to generate higher returns. Before we get into the featured stocks, let's take a look at the variables that are influencing the internet landscape.

The growth of the internet from static sites to the dynamic social and mobile web represents a strategic shift towards immersive experiences. This focus on greater connections and user engagement aligns with changing preferences and prepares the internet sector for increased vitality and long-term success.

The "immersive internet" age is the next evolutionary step in the online world. Beyond static web information, photographs, and videos, it strives to provide more engaging experiences that encourage shared engagement and collaboration. This transformational period includes Augmented Reality (AR) and Virtual Reality (VR).

The rise of generative AI also bodes favorably for the internet sector. Its applications in creating immersive digital worlds through automated generation of environments and assets can potentially upgrade user experiences, putting the industry at the forefront of innovation and engagement.

According to Gartner (IT), the revolutionary influence of generative AI is expected to redefine 70% of new web application and mobile app design and development processes by 2026. This prognosis has the potential to accelerate growth in the internet industry significantly.

Among industry advancements, the rise in internet usage is notable. Several e-commerce systems have emerged in recent years, each offering a virtual marketplace. The digitalization of hospital data, e-government initiatives, and the emerging platforms for media and entertainment content are also driving the industry growth.

According to a report by Grand View Research, the global broadband services size is projected to grow at a 9.7% CAGR, reaching $875.10 billion by 2030.

Moreover, the industry's trajectory is being fortified further by government initiatives aiming to enhance widespread internet accessibility and provide high-speed connectivity.

The Broadband Equity, Access, and Deployment (BEAD) Program, allocating $42.45 billion from President Biden's Bipartisan Infrastructure Law, propels the expansion of high-speed internet access through funding comprehensive planning, infrastructure deployment and adoption plans.

In terms of price performance, META has gained 9.2% over the past three months, while Z declined 10.2% during the same period. Moreover, META witnessed a 20.5% climb over the past six months, while Z plunged by 1.6% over the same duration.

However, META has surged 186.2% over the past year, closing the last trading session at $326.59, whereas Z has gained 26.6% during the same period, closing the last trading session at $46.73.

But which Internet stock could be a better pick? Let's find out.

Latest Developments

META reported that its family Daily Active People (DAP) was 3.14 billion on average for September 2023, indicating an increase of 7% year-over-year, while its family Monthly Active People (MAP) came in at 3.96 billion as of September 30, 2023, also reflecting an increase of 7% year-over-year.

In November, Z entered into an agreement to acquire Follow Up Boss, a Customer Relationship Management (CRM) system for real estate professionals. The acquisition is expected to help teams and agents deliver superior customer experiences, boost productivity, and grow their businesses.

Recent Financial Results

For the third quarter that ended September 30, 2023, META’s revenue increased 23.2% year-over-year to $34.15 billion. Its income from operations rose 142.7% from the year-ago value to $13.75 billion. Also, the company’s net income and EPS grew 163.5% and 167.7% from the prior year’s period to $11.58 billion and $4.39, respectively.

For the third quarter that ended September 30, 2023, Z’s revenue grew 2.7% year-over-year to $496 million. However, its loss from continuing operations widened 3.9% from the year-ago value to $53 million. Moreover, the company’s net loss and net loss per share stood at $28 million and $0.12, respectively, for the quarter.

Past and Expected Financial Performance

Over the past three years, META’s revenue increased at 17.1% CAGR. In addition, its total assets and levered free cash flow grew at respective CAGRs of 13.9% and 28.5%.

Analysts expect META’s revenue to grow 14.3% year-over-year to $133.31 billion for the fiscal year ending December 2023. In addition, the company’s EPS is expected to grow 66.9% from the prior year to $14.34.

Z's revenue decreased by 18.3% CAGR over the past three years. Its total assets fell at a marginal CAGR as well. Furthermore, during the same time frame, the company's levered free cash flow declined at a CAGR of 30%.

For the fiscal year ending December 2023, Z’s revenue is expected to decrease 69% year-over-year to $1.92 billion. Additionally, the company's EPS for the current year is expected to be $1.27, down 18.4% from the previous year.

Valuation

In terms of trailing-12-month Price/Sales, META is trading at 6.48x, 20.4% higher than Z, which is trading at 5.38x. Moreover, META’s trailing-12-month EV/Sales of 6.23x compares with Z’s 4.76x. However, META’s trailing-12-month Price/Cash Flow of 12.32x is 57.3% lower than Z’s 28.86x.

Profitability

META’s trailing-12-month revenue is 66.5 times that of what Z generates. Moreover, META is more profitable, with a trailing-12-month gross profit margin of 80.12%, compared to Z’s 79.28%. Also, META’s trailing-12-month EBITDA margin and net income margin of 42.58% and 23.42% compare with Z’s negative 8.13% and negative 8.24%.

POWR Ratings

META has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system. Conversely, Z 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. META has an A grade for Quality, consistent with its higher-than-industry profitability. The stock’s trailing-12-month levered FCF margin and trailing-12-month CAPEX/Sales of 23.19% and 22.56% are 203% and 452.1% higher than the industry averages of 7.65% and 4.09%, respectively.

On the other hand, Z has a C grade for Quality, which is in sync with its mixed profitability metrics. Its trailing-12-month levered FCF margin of 14.78% is 59.8% lower than the 36.76% industry average, whereas Z’s trailing-12-month CAPEX/Sales of 6.77% is 71% higher than the industry average of 3.96%.

In addition, META has a C grade for Stability, justified by its 60-month beta of 1.20. In comparison, Z has an F grade for Stability, consistent with its 60-month beta of 1.78.

Of the 57 stocks in the Internet industry, META is ranked #2, while Z is ranked #35. 

Beyond what we've stated above, we have also rated both stocks for Growth, Value, Momentum, and Sentiment. Click here to view META’s ratings. Get all Z ratings here.

The Winner

The shift to immersive experiences, the rise of generative AI, internet usage, diverse e-commerce platforms, digitization initiatives, and significant government investments are driving the internet industry's growth.

While both META and Z are poised to benefit from the boom in the industry, META's superior financial performance, increased profitability, and greater stability make it a better investment choice right now than Z.

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?

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META shares were trading at $329.64 per share on Friday afternoon, up $3.05 (+0.93%). Year-to-date, META has gained 173.92%, versus a 21.17% rise in the benchmark S&P 500 index during the same period.

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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