Internet stocks had a terrific first half of 2018, thanks to growing number of Internet users, improving speed & penetration, rapid adoption of 4G Volte technology, increasing demand for videos and proliferation of online retail.

The optimism surrounding the Internet stocks is strongly supported by robust year-to-date performance. Notably, the Invesco NASDAQ Internet ETF (PNQI) and First Trust Dow Jones Internet ETF (FDN) returned 26% and 32.9%, respectively, on a year-to-date basis compared with the S&P 500 Composite’s gain of 5%.

Key Growth Factors

The Internet stocks are expected to deliver a solid performance in the second quarter, due to strong e-commerce growth, expanding online delivery modes and increasing usage of social media platforms.

A shift in consumer preferences, driven by convenience and easy accessibility, is expected to keep the momentum of the industry going.

The improving macroeconomic environment has provided consumers with more disposable income, which, in turn, boosts their willingness to spend. This is evident from the surge in demand for food delivery, online travel booking, direct marketing and media services, and web hosting, among others.

The e-commerce sector continues to gather steam due to an explosion in internet usage, particularly in emerging economies like China and India. Online retail sales and emerging m-commerce have also witnessed significant growth, due to increased penetration of internet and smartphone use.

Further, the ubiquitous social-media has been a key driver behind the strong performance of the Internet stocks. Focus on video streaming has been driving user engagement that is attracting advertising dollars.

Moreover, massive data explosion and real-time analysis of user data supported by Artificial Intelligence (AI) tools are helping advertisers target the right audience, which is boosting their Return on Investment (ROI).

How to Make the Right Pick?

With the existence of a number of industry players, finding the right Internet stocks that have the potential to beat earnings can be a daunting task. Our proprietary methodology, however, makes it fairly simple for investors.

You could narrow down the list of choices by looking at stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP.

Earnings ESP is our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
 
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
 
Our Choices
 
Given below are five internet stocks that have the right combination of elements to post an earnings beat this quarter:

Chicago, IL-based Groupon (GRPN - Free Report) is expected to report second-quarter 2018 results on Aug 1. Currently, the company has an Earnings ESP of +74.20% and sports a Zacks Rank #1.

The daily discount deals provider is benefiting from a favorable product mix. Moreover, the company’s partnerships with Grubhub and ParkWhiz along with ongoing brand awareness programs are anticipated to boost revenues. Also, rising e-commerce spending on mobile devices is a positive for Groupon.

Brooklyn, NY-based Etsy (ETSY - Free Report) operates Etsy.com, a commerce platform to make, sell, and buy goods online and offline, primarily in the United States. The company’s focus on driving top-line growth and streamlining costs is expected to boost profitability.

Moreover, the company’s end-customer focus is appreciable. Further, it is helping sellers sell more by pushing products. 

This Zacks Rank #1 stock has an Earnings ESP of +13.33%. The company is expected to report second-quarter 2018 results on Aug 2.

Scottsdale, AZ-based GoDaddy (GDDY - Free Report) is benefiting from new product introductions and expanding customer base. The company's new mobile-optimized website builder, GoCentral, has gained significant momentum in recent times and is a key catalyst.  

This Zacks Rank #2 stock has an Earnings ESP of +89.19%. The company is set to report second-quarter 2018 results on Aug 2.

Menlo Park, CA-based Facebook (FB  - Free Report) currently has a Zacks Rank #3 and an Earnings ESP of +0.85%.

The first half of 2018 has not been good for Facebook, primarily due to the Cambridge Analytica data privacy scandal that impacted almost 87 million users. It has also been criticised for its data sharing practices.

However, Facebook’s initiatives aimed at building a safer community by strengthening security as well as curbing fake news, terrorism-related content and political propaganda is expected to boost user engagement. This is likely to attract more advertising dollars, directly benefiting the top-line growth. Instagram is also a key catalyst.

Facebook is set to report second-quarter 2018 results on Jul 25.

Seattle, Washington-based Amazon (AMZN  - Free Report) is expected to benefit from the Whole Foods acquisition and increasing number of paid Prime members. Moreover, the company’s expanding distribution footprint bodes well for the Prime subscription service.

Amazon keeps its retail business very hard to beat on price, choice and convenience with the help of a solid loyalty system in Prime and its FBA strategy. Prime members are much more loyal and spend double the amount spent by non-Prime members, which improves profitability.

Amazon has a Zacks Rank #3 and an Earnings ESP of +0.74%. The company is expected to report second-quarter 2018 results on Jul 26.