Backed by the increase in digital activities, government initiatives, and heightened reliance on online services, the internet industry’s long-term prospects remain promising. Therefore, in this piece, I have compared the fundamentals of internet stocks LegalZoom.com, Inc. (LZ) and Zillow Group, Inc. (Z) to ascertain which one could be a better buy.
The global count of internet users has reached 5.30 billion as of October 2023, representing 65.7% of the world's population. Additionally, social media engagement encompasses 4.95 billion people or 61.4% of the global population, highlighting the integral role of the internet and social media in global connectivity.
On top of it, government initiatives play a crucial role in accelerating the growth of internet connectivity. For instance, the National Telecommunications and Information Administration (NTIA) under the Department of Commerce announced an investment of nearly $50 million to improve middle-mile high-speed internet infrastructure in New Hampshire, Tennessee, Virginia, and Wyoming.
This initiative represents a significant stride in the Biden-Harris Administration's dedication to ensuring affordable and reliable high-speed internet access for all Americans, aligning with President Biden's Investing in America agenda.
Furthermore, wireless technology stands out as a key catalyst, holding immense potential to accelerate the ongoing global digital revolution by fostering productivity enhancements and economic efficiencies across diverse sectors. The global market size for broadband services is anticipated to exhibit a CAGR of 9.7% from 2023 to 2030.
Given the favorable long-term industry prospects, LZ and Z should benefit from them. However, LZ appears to have outperformed Z in terms of price performance by surging 52% year-to-date compared to Z’s 31.3% year-to-date gains.
In addition, over the past three months, LZ’s shares have surged 4.6% to close the last trading session at $11.79, while Z’s shares have plunged 17.1% during the same period to close the last trading session at $42.29.
Keeping all these factors in mind, let us delve deeper into the fundamentals of the featured Internet stocks for a better perspective.
Recent Developments
On November 1, LZ introduced a new business license product designed to assist businesses in achieving compliance and legal operation. Utilizing a proprietary nationwide database, this innovative product offers a user-friendly experience by aligning a small business profile with pertinent licenses and permits.
By streamlining the often intricate and time-consuming process of researching and uncovering regulatory requirements, the business license product aims to support business owners in navigating legal compliance effortlessly.
Conversely, on the same day, Z finalized an agreement to acquire Follow Up Boss, a customer relationship management system tailored for real estate professionals. Follow Up Boss serves as a centralized hub, enabling teams and agents to stay organized, engage with customers, facilitate deal closures, and enhance their overall productivity.
This strategic move aims to empower clients in delivering optimal customer experiences and catalyzing the growth of their businesses.
Recent Financial Results
LZ’s revenue for the fiscal third quarter (ended September 30, 2023) increased 7.7% year-over-year to $167.27 million, while its gross profit rose 2.9% from the year-ago value to $108.06 million. Moreover, the company’s net income amounted to $7.53 million and $0.04 per share versus a net loss of $11.98 million and $0.06 per share in the prior-year quarter, respectively.
On the contrary, for the fiscal third quarter, which ended on September 30, 2023, Z’s total revenue amounted to $496 million, while its adjusted EBITDA declined 17.7% year-over-year to $107 million. The company’s gross profit came in at $386 million, down 2% from the year-ago value. Also, during the same period, its net loss amounted to $28 million.
Past and Expected Financial Performance
LZ’s revenue grew at a CAGR of 14.9% over the past three years. The consensus revenue estimate of $156.49 million for the fiscal fourth quarter ending December 2023 reflects a 6.7% rise year-over-year. The consensus EPS estimate of $0.10 for the same period, represents a marginal improvement year-over-year.
Conversely, Z’s revenue declined at a CAGR of 18.3% over the past three years. Analysts expect Z’s revenue for the fourth quarter (ending December 2023) to be $448.01 million. While its EPS for the current quarter is projected to come in at $0.13, declining 38.4% year-over-year.
Profitability
LZ is more profitable, with a trailing-12-month asset turnover ratio of 1.53x, higher than Z’s trailing-12-month asset turnover ratio of 0.29x. Additionally, LZ’s trailing-12-month EBIT margin of 3.08% compares to Z’s negative trailing-12-month EBIT margin of 11.91%. Likewise, LZ’s trailing-12-month EBITDA margin of 4.47% compares to Z’s negative trailing-12-month EBITDA margin of 8.13%.
POWR Ratings
LZ has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. Conversely, Z has an overall rating of C, translating to a 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. LZ’s C grade for Stability is in sync with its 60-month beta 1.04. On the other hand, Z’s F grade for Stability is justified by its 60-month beta of 1.80.
Moreover, LZ has a B grade for Quality, justified by its higher-than-industry profitability. LZ’s trailing-12-month gross profit margin of 64.42% is 112.2% higher than the industry average of 30.35%. Also, its trailing-12-month levered FCF margin of 13.20% is 118.5% higher than the industry average of 6.04%.
Conversely, Z has a C grade for Quality, justified by its mixed profitability. The stock’s trailing-12-month asset turnover ratio of 0.29x is 120.2% higher than the industry average of 0.13x. However, its trailing-12-month levered FCF margin of 14.78% is 59.8% lower than the industry average of 36.77%.
Among the 57 stocks in the Internet industry, LZ is ranked #6, while Z is ranked #37.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Value, Momentum, and Sentiment. Click here to view LZ’s ratings. Get all Z ratings here.
The Winner
While both LZ and Z should benefit from the industry tailwinds, however after examining the fundamentals of both the stocks, LZ emerges as a more compelling investment candidate, supported by its solid financial standing, robust profitability, and favorable sentiment expressed by analysts, especially when considering Z’s relatively dimmed analyst sentiment and lower profitability.
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.
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Z shares were trading at $40.78 per share on Thursday afternoon, down $1.51 (-3.57%). Year-to-date, Z has gained 26.61%, versus a 20.00% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Mukherjee
Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.
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