In this article, we discuss the 10 undervalued internet stocks with huge upside. If you want to skip our detailed analysis of these stocks, go directly to ‘The Next Facebook’: 5 Undvervalued Internet Stocks with Huge Upside.
The age of internet and social media has minted several billionaires at the market over the past decade and a half. Facebook, Inc. (NASDAQ: FB), the California-based social media giant, is perhaps the poster boy for this technological revolution. Facebook, Inc. (NASDAQ: FB) debuted on the stock market in 2012 at $38 per share when it had 526 million daily active users, 901 million monthly active users, and trailing 12-month net income of $974 million. In 2019, just before the pandemic, the share price of the company was $191, the daily active users had jumped to 1.5 billion, the monthly active users were over 2.4 billion, and the trailing 12-month net income stood at close to $6 billion.
The incredible numbers posted by Facebook, Inc. (NASDAQ: FB) in a space of just seven years, which have almost doubled in the two years since 2019, underline the explosive growth in technology equities over the past year and a half that has pushed market valuations to record highs. This has also led to a decrease in average investor interest in the stock since it is priced at levels that are out of reach for most investors on the market.
For those who want exposure to the internet market but cannot buy expensive stocks like Facebook, there are several alternatives, including Twitter, Inc. (NYSE: TWTR), Twilio Inc. (NYSE: TWLO), Pinterest, Inc. (NYSE: PINS), and Snap Inc. (NYSE: SNAP), among others discussed in detail below.
The global internet services market was valued at over $450 billion in 2020, the year in which the pandemic fundamentally altered how the society functions, accelerating a push towards digital offerings. The internet market is expected to grow at a compound annual growth rate of 5% through 2027 and reach a value of $652 billion. US-based equities presently control close to 30% of the total global market share in the industry. However, other countries are catching up. For example, the Chinese internet services market will grow at a rate of 4.7% in the next five years to reach a value of $111 billion.
Photo by S O C I A L . C U T on Unsplash
Investors keen to jump on the incredible returns offered by internet stocks should take note of these trends. There is little doubt that internet stocks have transformed the stock market. The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and July 2021 our monthly newsletter’s stock picks returned 186.1%, vs. 100.1% for the SPY. Our stock picks outperformed the market by more than 115 percentage points (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Our Methodology
With this context in mind, here is our list of the 10 undervalued internet stocks with huge upside.
The main idea behind this article is to mention some great internet and social media stocks that have the potential to soar in value in the future. We wanted to highlight some notable and undervalued internet stocks that might be solid investment options for investors who want to invest in social media and internet space but don’t want to buy expensive and already-matured stocks like Facebook.
These were ranked according to the number of hedge fund holders in each company. Data from the 866 funds tracked by Insider Monkey was used for this purpose. Special importance was assigned to the basic business fundamentals and analyst ratings for each firm. In addition, the observations of market experts regarding the stocks and the growth potential they offer in the internet business over the long term were also considered for the final listing.
‘The Next Facebook’: Undvervalued Internet Stocks with Huge Upside
10. Weibo Corporation (NASDAQ: WB)
Number of Hedge Fund Holders: 12
Weibo Corporation (NASDAQ: WB) is placed tenth on our list of 10 undervalued internet stocks with huge upside. The company operates from China and owns and runs a social media platform for the creation and sharing of content. According to WY Capital, a market expert that frequently writes on stocks, the low pricing of the firm makes no sense. Simply Wall Street contends that the profits for the company are expected to double in the coming years and a higher cash flow is also in the offing. Both these indicators point to a higher valuation for the firm in the near-term.
On May 10, investment advisory Jefferies reiterated a Buy rating on Weibo Corporation (NASDAQ: WB) stock and raised the price target to $60 from $57.3, appreciating the earnings beat of the company in the first quarter and increasing video ad revenue.
Out of the hedge funds being tracked by Insider Monkey, Washington-based investment firm Steelhead Partners is a leading shareholder in Weibo Corporation (NASDAQ: WB) with 49.7 million shares worth more than $48 million.
Just like Twitter, Inc. (NYSE: TWTR), Twilio Inc. (NYSE: TWLO), Pinterest, Inc. (NYSE: PINS), and Snap Inc. (NYSE: SNAP), Weibo Corporation (NASDAQ: WB) is one of the best undervalued internet stocks with huge upside for those who want to avoid Facebook, Inc. (NASDAQ: FB).
9. Yelp Inc. (NYSE: YELP)
Number of Hedge Fund Holders: 20
Yelp Inc. (NYSE: YELP) is ranked ninth on our list of 10 undervalued internet stocks with huge upside. The company is headquartered in California and operates an online platform that connects consumers with local businesses. According to Gary Alexander, a market expert focusing on technology companies, the share price of the firm has surged 30% year-to-date on the back of recovery momentum and the stock looks attractively priced given the strengthened profitability base of the firm and the market share it commands in the review business.
On August 6, investment advisory maintained an Outperform rating on Credit Suisse Yelp Inc. (NYSE: YELP) stock and raised the price target to $53 from $43, noting that the benefits derived from previous investments in ad products by the firm.
At the end of the first quarter of 2021, 20 hedge funds in the database of Insider Monkey held stakes worth $513 million in Yelp Inc. (NYSE: YELP), down from 31 in the previous quarter worth $527 million.
In addition to Twitter, Inc. (NYSE: TWTR), Twilio Inc. (NYSE: TWLO), Pinterest, Inc. (NYSE: PINS), and Snap Inc. (NYSE: SNAP), Yelp Inc. (NYSE: YELP) is one of the best undervalued internet stocks with huge upside for those who want to avoid Facebook, Inc. (NASDAQ: FB).
8. Sonos, Inc. (NASDAQ: SONO)
Number of Hedge Fund Holders: 46
Sonos, Inc. (NASDAQ: SONO) is a California-based firm that makes and sells audio room products. It is placed eighth on our list of 10 undervalued internet stocks with huge upside. According to market expert Vladislav Kolomeets, the EBITDA margin for the company could reach 20% within the next three years. With the balance of liquidity assets already at 62%, the cash and equivalents could be an important growth driver for the company in the coming years. Kolomeets noted that the firm was trading at a discounted price compared to the fair value.
On August 16, investment advisory Jefferies upgraded Sonos, Inc. (NASDAQ: SONO) stock to Buy from Hold and raised the price target to $50 from $43, noting that a court win over Google would strengthen the patent portfolio of the company.
At the end of the first quarter of 2021, 46 hedge funds in the database of Insider Monkey held stakes worth $763 million in Sonos, Inc. (NASDAQ: SONO), up from 43 the preceding quarter worth $603 million.
Alongside Twitter, Inc. (NYSE: TWTR), Twilio Inc. (NYSE: TWLO), Pinterest, Inc. (NYSE: PINS), and Snap Inc. (NYSE: SNAP), Sonos, Inc. (NASDAQ: SONO) is one of the best undervalued internet stocks with huge upside for those who want to avoid Facebook, Inc. (NASDAQ: FB).
7. Spotify Technology S.A. (NYSE: SPOT)
Number of Hedge Fund Holders: 46
Spotify Technology S.A. (NYSE: SPOT) is a Luxembourg-based company that markets audio streaming services. It is ranked seventh on our list of 10 undervalued internet stocks with huge upside. According to Jack Raines, a finance expert, the stock has tremendous growth potential since it is operating in the podcasting sector of the market, the fastest growing media segment. The firm has invested heavily in attracting big stars and is set up perfectly to support the content creators of the future. He contends that the company could have a monopoly over the audio business in the coming years.
On July 29, investment advisory Guggenheim upgraded Spotify Technology S.A. (NYSE: SPOT) stock to Buy from Neutral. Michael Morris, an analyst at the advisory, issued the ratings update regarding the streaming company.
Out of the hedge funds being tracked by Insider Monkey, New York-based investment firm Tiger Global Management LLC is a leading shareholder in Spotify Technology S.A. (NYSE: SPOT) with 3.1 shares worth more than $852 million.
Twitter, Inc. (NYSE: TWTR), Twilio Inc. (NYSE: TWLO), Pinterest, Inc. (NYSE: PINS), and Snap Inc. (NYSE: SNAP) are of the best undervalued internet stocks with huge upside for those who want to avoid Facebook, Inc. (NASDAQ: FB), just like Spotify Technology S.A. (NYSE: SPOT).
In its Q4 2020 investor letter, Guardian Fund, an asset management firm, highlighted a few stocks and Spotify Technology S.A. (NYSE: SPOT) was one of them. Here is what the fund said:
“At the current share price, Spotify basically only represents a fraction of the value they will be able to unlock in the growing market of audio entertainment. The key for Spotify is to change a variable cost base into a fixed cost base just like Netflix has. As the market share of the big labels, measured by the daily hours of engagement of the big labels, is declining, Spotify will be able to adjust its business model and create enormous operational leverage meaning that profitability will grow faster than expenses.
The music catalogue is not the business model. The value lies in the machine learning that drives discovery and engagement, the original content from people like Michelle Obama, Kim Kardashian, and Joe Rogan, the data analytics and distribution for artists, the direct and social relations artists can have with fans through music and videos. We believe that Spotify will be worth at least five times more in 2030.”
6. Zynga Inc. (NASDAQ: ZNGA)
Number of Hedge Fund Holders: 47
Zynga Inc. (NASDAQ: ZNGA) is placed sixth on our list of 10 undervalued internet stocks with huge upside. The firm is run from California and markets social gaming services. Aleksandr Sayganov, the head of research at a Russian equity firm, has outlined a bull case for the company in which the firm can grow by 15% per year. The researcher noted that the company was expected to grow at a rate of 40% EBITDA. He also underlined how nearly 10% of the world population played the games that the company marketed. The growth of the mobile game segment in recent years would benefit the company as it made most of the money from this, Sayganov highlighted.
On May 6, investment advisory Bank of America upgraded Zynga Inc. (NASDAQ: ZNGA) stock to Buy from Neutral with a price target of $13.5, noting that the firm had delivered a strong first quarter with sustainable double-digit organic growth.
At the end of the first quarter of 2021, 47 hedge funds in the database of Insider Monkey held stakes worth $1.1 billion in Zynga Inc. (NASDAQ: ZNGA), down from 52 in the previous quarter worth $1 billion.
Twitter, Inc. (NYSE: TWTR), Twilio Inc. (NYSE: TWLO), Pinterest, Inc. (NYSE: PINS), and Snap Inc. (NYSE: SNAP) are of the best undervalued internet stocks with huge upside for those who want to avoid Facebook, Inc. (NASDAQ: FB), in addition to Zynga Inc. (NASDAQ: ZNGA).
In its Q4 2020 investor letter, Artisan Partners Limited Partnership, an asset management firm, highlighted a few stocks and Zynga Inc. (NASDAQ: ZNGA) was one of them. Here is what the fund said:
“We also added to our position in Zynga. Our multiyear investment campaign in Zynga has been based on a new management team’s ability to drive steady growth in the company’s base portfolio of games, expand margins, reinvigorate the new game development pipeline and use its strong balance sheet to acquire complementary games and studios. Shares have been pressured in recent quarters, presumably because of investor concerns about the company’s moderating growth rate and Apple’s pending new privacy policy which will make it more difficult for Zynga to both efficiently acquire new players and sell advertising in its games. We believe the company has multiple growth levers it can pull in the periods ahead, including the rollout of new games, acquisitions, further penetration into international markets and entry into new gaming categories, to name a few. Furthermore, our research suggests the Apple privacy policy change is manageable for larger mobile game developers such as Zynga. Given our strong conviction in the profit cycle, we used recent weakness to add to our position.”
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Disclosure. None. ‘The Next Facebook’: 10 Undervalued Internet Stocks with Huge Upside is originally published on Insider Monkey.
