Macro factors currently driving the economy, such as inflation, interest rates, labor markets, supply chain issues and so forth have a varied impact on players in the extremely diverse Internet - Services industry, although a stronger economy is generally positive. Therefore, the ongoing tariff war, declining consumer confidence and declining Producer Price Index (PPI) figures may be considered negative for the industry.
 
Our picks are Baidu BIDU, Dropbox DBX and Crexendo CXDO. Most industry players are heavily investing in artificial intelligence (AI) and machine learning, as this allows them to provide additional features and differentiate their offerings. Being a capital-intensive industry with high fixed costs of operation and the fairly constant need to build infrastructure, a high interest rate just isn’t very positive for it. Therefore, any rate cuts this year would make us incrementally positive about the Internet Services industry.

About the Industry

Internet - Services companies are primarily those that rely on huge software and hardware infrastructure, referred to as their properties, to deliver various services to consumers. People can avail the services by accessing these properties with their personal connected devices from almost anywhere in the world.

Companies generally operate two models: an ad-based model and an ad-free model, where the service is charged. Alphabet, Baidu and Akamai are some of the larger players while Crexendo, Upwork, Dropbox, Etsy, Shopify, Uber, Lyft and Trivago are some of the emerging players. Very large players (mainly Alphabet) tend to skew averages. Because of the diversity of services offered, it is difficult to identify industrywide factors that could affect all players. The effect of macro factors such as inflation, rate hikes, supply chain issues and so forth vary by company.

Factors Determining Industry Performance

• Data is central to success in this industry, as it allows the players to build artificial intelligence (AI) models to improve the quality of services, create new technologies and services, and also to lower the cost of operation. While not all businesses are built on the same scale or have the same customer reach, AI tools are increasingly helping organizations of every size. They are tremendously increasing operational efficiency and the scope for growth. Internet service providers are also able to differentiate their product based on the scale, flexibility and choice in AI-powered tools that they offer. Larger companies often have the edge in AI because they have access to larger data sets that can be processed to further develop their AI.

• It goes without saying that increased digitization of different aspects of daily life is a driver for the entire industry because digitization essentially transfers work online, which is where Internet service providers are required. Gen Z is also becoming a larger part of the spending, and their comfort with all things virtual further increase opportunities for targeting. The expansion of the installed base of connected devices beyond PCs and smartphones to IoT, automotive and more is creating additional opportunities. The ownership of multiple devices also drives people to use these services more as they increasingly automate routine chores.

• Being a capital-intensive industry, there is the need to raise funds to build out costly infrastructure. Funds are also needed to maintain this infrastructure. Given the secular growth prospects, companies continued infrastructure investments through 2023 and 2024, despite high interest rates. With interest rates coming down this year, capex is likely to continue. Ex-Alphabet PP&E displays some seasonality although the trend remains upward, meaning that companies are investing heavily in their infrastructure.
• Traffic/customer acquisition is one of the most important drivers of revenue, so companies invest in advertising or building communities that can draw more users to their online properties, to use the service more or spend more time on the platform, much like a store owner would try to keep a prospective buyer within the store. Some large players, including those providing infrastructure services, grow by tying up with other large players for access to their customers. Since the personal touch is absent in an online store, many rely on cookies and other technologies to track users, collect data and profile them in order to better understand their needs.

Zacks Industry Rank Deteriorates Slightly

The Zacks Internet - Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #142, which places it among the bottom 43% of 250 odd Zacks-classified industries.

The group’s Zacks Industry Rank, which is basically the average rank of all the member stocks, indicates that there are several opportunities in the space.

Looking at the aggregate earnings estimate revisions over the past year, we see that the 2025 estimate jumped materially in October last year and stayed relatively flat since then, while the 2026 estimate has been more pessimistic. Overall, the industry’s earnings estimate for 2025 is up 1.8% from April 2024 while it is down 3.6% for 2026.

Historically, the top 50% of Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. So the industry having slipped into the bottom 50% indicates that it may not do as well.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Stock Market Performance Has Been Volatile

Over the past year, the industry has been more volatile than both the broader Technology sector and the S&P 500. Up to July 2024, the industry was trading at a premium to both, after which it dropped below each of them. It rose again between December and January only to fall back down thereafter.

As a result, the industry’s net gain of 1.7% is less than the broader sector’s 2.8% gain and the S&P 500’s 6.5% gain.

One-Year Price Performance

Image Source: Zacks Investment Research

Industry's Current Valuation: Attractive

On the basis of forward 12-month price-to-earnings (P/E) ratio, we see that the industry is currently trading at a 17.52X multiple, which is a discount to its median value of 20.56X over the past year. It is also a discount to the S&P 500’s 19.71X and a greater discount to the sector’s 22.26X.

Over the past year, the industry has traded in the range of 17.47X to 23.16X, a broader range than the S&P’s 19.71X to 22.7X. The sector has traded in the 22.26X to 28.53X range.

Forward 12 Month Price-to-Earnings (P/E) Ratio

Image Source: Zacks Investment Research

3 Solid Bets

A growing number of players in the Internet Services industry are looking good at this point. This despite the fact that the industry is highly diverse, and so there’s the possibility that some players would be doing exceedingly well while others not so much. We currently have a Zacks #1 (Strong Buy) rating on Baidu and Dropbox and Zacks #2 (Buy) rating on Crexendo, discussed below.

Baidu Inc. (BIDU): Beijing based Baidu’s core business includes online marketing services; various PaaS, SaaS, and IaaS based cloud services for enterprise, public sector and individual customers; devices, consumer-facing services and intelligent driving.

The company uses AI at its core, which differentiates its offerings from smaller or younger players. Other than search, feed, short video, marketing and other web and app-based services in China, it offers self-driving services, including maps, automated valet parking, autonomous navigation pilot; electric vehicles and robotaxi fleets, as well as Xiaodu smart devices.

Further, the company provides iQIYI, an online entertainment service, including original and licensed content; other video content and membership; and online advertising services. Baidu also has a strategic partnership with automaker Zhejiang Geely Holding Group.

The company is in the process of transformation from an Internet-centric to an AI-first business, and in 2024 made considerable headway in this direction. Its AI investments are expected to provide a more significant contribution in 2025.

Baidu’s revenues have been moving roughly sideways over the last three years, although there have been some ups and downs. The primary growth engine at this time is its AI Cloud, although it continues to make significant progress in intelligent driving as well. Apollo Go, its ride hailing service, provided over 1.1 million rides in the fourth quarter of 2024, up 36% year over year. It has commenced 100% fully driverless operations across China since Feb 2025. Fully autonomous testing in Hong Kong began in November last year. Its mobile ecosystem remains strong with 679 million monthly active users (MAUs) in December.

Baidu is set to report March quarter results on May 15, and the estimate revision trend in the last 30 days shows growing analyst optimism. The 2025 estimate has increased 49 cents (5.1%) during this period while the 2026 estimate increased 55 cents (4.9%). Analysts are expecting revenue and earnings growth of a respective 1.3% and -4.3% this year, followed by a respective 4.2% and 16.3% in the next.

The shares of this #1-ranked company are down 11.4% over the past year.

Price and Consensus: BIDU

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Dropbox, Inc. (DBX): San Francisco, CA-based Dropbox provides a content collaboration platform worldwide. The company's platform facilitates collaboration between individuals, families, teams and organizations (professional services, technology, media, education, industrial, consumer and retail, and financial services industries). The free sign-up through its website or app offers limited features and is supplemented with a paid subscription tier for premium services.

Over the last couple of years, Dropbox has been incorporating AI across its business to improve customer experience and thereby increase its average revenue per user. Its universal AI-powered search platform Dash has been popular with customers, leading to the launch of Dash for Business last October. This is expected to reduce its headcount by 20% or around 528 employees, the second such reduction in 18 months. The flatter operating structure should increase efficiencies, besides realigning the business with current growth objectives.

The company beat earnings estimates in the last quarter by 17.7% and the 2023 estimate is up 8 cents (4.8%) in the last 30 days. The 2024 estimate is also up 9 cents (4.6%). Analysts currently expect 2025 revenue and earnings growth of -2.9% and 2.0%, respectively. For 2026, they’re expecting 0.5% revenue growth and 11.5% earnings growth. Estimates for both years remain unchanged in the last 30 days.

The shares of this Zacks Rank #1 (Strong Buy) stock are up 16.7% over the past year.

Price and Consensus: DBX

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Crexendo, Inc.  (CXDO): Tempe, AZ-based Crexendo is a provider of Unified Communications as a Service (UCaaS), Call Center as a Service (CCaaS), communication platform software solutions, and collaboration services designed to provide enterprise-class cloud communication solutions to businesses of any size through their business partners, agents and direct channels.

The company is seeing significant growth opportunities for its adaptable and reliable software solutions where Crexendo operates in a niche not attractive to larger players like Microsoft and Cisco. Additionally, the integration of AI in telecom services is enabling it to better serve a diverse clientele of small, mid-size and enterprise-level customers.

Crexendo topped estimates in the last quarter. Its revenue beat by around 3.5% while earnings beat by 100%. The 2025 and 2026 estimates have not changed in the last 30 days. At these levels, they represent a 10.2% increase in revenue and a 7.7% increase in earnings for 2025. Revenue and earnings are expected to grow a respective 10.0% and 16.1% the following year.

The shares of this Zacks Rank #2 (Buy) stock are up 1.6% over the past year.

Price and Consensus: CXDO

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