Comparing America's 3 Largest Internet Service Providers

Summary The Internet Service Providers industry is expected to outperform the S&P broader market substantially this quarter, underperform significantly next quarter, then outperform significantly in 2015 and beyond. Mean and high targets for the 3 largest U.S. Internet Service Providers companies – Trulia Inc, United Online, Spark Networks - range from 16% to 81% above current prices. Find out which among Trulia, United and Spark offers the best stock performance and investment value. * All data are as of the close of Wednesday, December 31, 2014. Emphasis is on company fundamentals and financial data rather than commentary. To understand what types of companies the Internet Service Providers industry contains, we need to make some distinctions, as the category is not as self-explanatory as one might think. Oddly enough, the Internet Service Providers industry does NOT include internet service providers. Mention "internet service providers" and we automatically think of companies that provide access to the internet through television cables, telephone lines, or wireless satellite systems. But those internet "access" providers are categories into various other industries, such as: • the Telecom Services industry - which includes Verizon (NYSE: VZ), AT&T (NYSE: T), CenturyLink (NYSE: CTL) and others, which industry is compared here, • the CATV Systems industry - which includes DirectTV (NASDAQ: DTV), Time Warner Cable (NYSE: TWC), and Dish Network (NASDAQ: DISH) and others, which industry is compared here, and • the Entertainment Diversified industry - which includes Comcast (NASDAQ: CMCSA) and others, which industry is compared here. No, the Internet Service Providers industry being covered in this comparison is limited to companies that provide services over the internet, not service to the internet. If you ask me, they could easily avoid the confusion simply by adding one letter to the industry's title, calling it "Internet Services Providers" instead of "Internet Service Providers". But that would mean writers like me would have less to write about. So now that we have that whole mess straightened out, just what kinds of internet services do the largest three U.S. companies in the space provide? • Trulia, Inc. (NYSE: TRLA), headquartered in San Francisco, California, provides an online platform for locating homes for sale or rent, helping not just buyers and renters search for their next residence but also enabling real estate professionals to market their listings. The company's platform supplies such information as a home's nearby schools, crime rates, neighborhood amenities, home values, and local community services. It should be noted that Trulia's largest competitor - Zillow, Inc. (NASDAQ: Z), which provides similar home buying and renting information - is actually categorized into a different industry, the Property Management industry in the Financial sector. This is most likely because Zillow also allows borrowers to connect with mortgage lenders, even though the company does not offer any financial services per se. These classifications never cease to amaze. • United Online, Inc. (NASDAQ: UNTD), headquartered in Woodland Hills, California, provides social networking services and products under the Classmates, StayFriends, and Trombi brand names, which include social platforms that enable users to locate and interact with acquaintances from their past. It also offers dial-up Internet access services under the NetZero and Juno brand names, providing mobile broadband, DSL, email, Internet security, and Web hosting services. So there you go… this one does live up to its industry's name. • Spark Networks, Inc. (NYSE: LOV), headquartered in Los Angeles, California, provides online personals services and dating services for singles to meet, participate in community events, and form relationships through its principal sites ChristianMingle.com targeting Christian singles and JDate.com targets Jewish singles. It also offers travel and other recreational events, including weekend getaways, dinners, speed dating events, or other meeting events. Yet as popular as these online services may be, the companies' stocks have not provided very good service to investors on a relative basis, as per the graph below. Since the recovery began in March of 2009, where the broader market S&P 500 index [black] has gained 205% and the SPDR Technology sector ETF (NYSE: XLK) [blue] has gained 212%, only one of the three companies here compared has come close to the two benchmarks - namely Trulia [beige], which has risen 90% in its short 2.5 year publicly traded history, averaging a comparable rate of growth. For their part, United [purple] has gained 180%, while Spark [orange] has been rather unattractive with gains of just 55%. On an annualized basis, where the S&P has averaged 35.65% and XLK has averaged 36.87%, Spark has averaged 9.57%, United has averaged 31.30%, and Trulia has averaged 37.24% per year. These would still be great returns in any normal period. But the recovery since 2009 has not been a normal period, and much better returns have been found elsewhere. (click to enlarge) Source: BigCharts.com Looking at future earnings growth, the Internet "Services" Providers industry (we may as well call it by its clearer name) as a whole is expected to out-provide the broader market considerably, as tabled below where green indicates outperformance while yellow denotes underperformance. In the current quarter, the industry is seen outgrowing the market's growth rate at some 3.13 times its average, before slowing to a lesser but still robust rate of 2.68 times in 2015, and 2.21 times annually over the next five years. (click to enlarge) Zooming-in a little closer, the earnings growth rates of our three competitors look very promising, as tabled below. Although Trulia's and United's earnings are seen shrinking in the current quarter, both companies are seen growing in leaps and bounds going forward - with United beating the S&P's average growth at 13.97 times next quarter, and Trulia beating it at 21.63 times in 2015. But the earnings sparks fly for Spark as well, without a near term set back, as it is expected to beat the broader market's growth as far as the eye can see. (click to enlarge) Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment? Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking. A) Financial Comparisons • Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking. (click to enlarge) • Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example. In the most recently reported quarter, Trulia delivered the greatest revenue growth year-over-year at an exceptional degree, while Spark delivered the least, even shrinkage along with United. Since none of the companies' trailing earnings growth is available, the metric cannot factor into the comparison. (click to enlarge) • Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation. Of our three contestants, Spark operated with the widest profit margin while United operated with the widest operating margin. At the narrow end of the scale, United and Trulia contended with the narrowest margins. It is worth noting that all three companies reported negative margins, denoting loss by all. (click to enlarge) • Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders. For their managerial performance, United's management team delivered the greatest returns on assets where Trulia's team delivered the greatest returns on equity. At the low end of the spectrum, Spark's team delivered the least. Here again it is worth noting that all three companies reported negative returns, denoting loss of assets and equity by all three. (click to enlarge) • Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value. Of the three companies here compared, Trulia provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while United's DEPS over current stock price is lowest, even negative denoting loss. And of course, here again all three companies' figures are negative, denoting loss. (click to enlarge) • Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain. Among our three combatants, United's stock is cheapest relative to company book value, while Trulia's is cheapest relative to 5-year PEG. At the overpriced end of the scale, Spark's stock is the most overvalued relative to company book, where United's is most overpriced relative to PEG. Since Spark's price to forward earnings is not available, the metric does not factor into the comparison, though it is worth noting that Trulia's price to forward earnings is tremendously overpriced compared to United's. (click to enlarge) B) Estimates and Analyst Recommendations Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations. • Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices. Of our three specimens, United offers the highest percentage of earnings over current stock price for all time periods. At the low end of the scale, Trulia offers the lowest percentages for next quarter (shrinkage even), while Spark offers it for all remaining periods (with shrinkage for 2015). (click to enlarge) • Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior. For earnings growth, Spark offers the greatest growth in the current quarter, United offers it next quarter, where Trulia offers it in 2015 and beyond. At the low end of the spectrum, Trulia offers the slowest growth prospects over the near term (with some shrinkage), United offers it in 2015, while both United and Spark are tied for slowest growth annually over the next five years. (click to enlarge) • Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies. For their high, mean and low price targets over the coming 12 months, analysts believe Spark's stock offers the greatest upside potential and least downside risk, while United's stock offers the least upside and Trulia's offers the greatest downside. It must be noted, however, that United's and Spark's stocks are already trading below their low targets. While this may mean increased potential for sharp moves upward, it may warrant reassessments of future expectations. It must also be noted that United and Spark each has only one broker making a prognostication, potentially limiting the targets' accuracy. (click to enlarge) • Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles. Of our three contenders, United is best recommended with 0 strong buy and 2 buys representing a combined 100% of its 2 analysts, followed by Spark with 1 strong buy and 0 buy ratings representing 50% of its 2 analysts, and lastly by Trulia with 0 strong buy and 1 buy recommendation representing 11.11% of its 9 analysts. (click to enlarge) C) Rankings Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another. In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison. The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits. (click to enlarge) And the winner is… United in a class all by itself, outperforming in 14 metrics and underperforming in 7 for a net score of +7, followed far behind by both Trulia and Spark in a tie at -4 a piece. Where the Internet Services Providers industry is expected to outperform the S&P broader market substantially this quarter, underperform significantly next quarter, then outperform significantly in 2015 and beyond, the three largest U.S. companies in the space are expected to outgrow the broader market in earnings at pretty impressive rates - with Spark growing as much as 8.29 times next quarter, United growing as much as 13.97 times next quarter, and Trulia growing as much as 21.63 times the S&P's average growth rate in 2015. Yet after taking all company fundamentals into account, United Online, Inc. brings investors together given its lowest stock price to company book value, highest cash and revenue over market cap, lowest debt over market cap, widest operating margin, highest return on assets, highest EBITDA over market cap and revenue, highest future earnings over current stock price in all periods, highest future earnings growth next quarter, and most analyst buy recommendations - decisively winning the Internet Service Providers industry competition. Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. (More...)