NEW YORK (TheStreet) -- Turmoil at Twitter (TWTR) prompted us to look into the Internet software and services sector. The company announced last week that it would replace its CEO on poor financial performance tied to inability to increase the base of 302 million active users.
Growth in mobile is a driver for companies in the sector. Another important revenue driver is growth in cloud computing services. Growth in digital advertising is also helping grow revenue in the sector. Digital advertising is a growing share of total advertising spending, which itself is a function of a growing economy, so one could expect these internet software and services companies to benefit from of a growing market.
The brightening jobs outlook provides further confirmation of a stronger economy the rest of 2015.
So, what are the best internet software and services stocks that investors should be buying? Here are the top three, according to TheStreet Ratings,TheStreet's proprietary ratings tool.
TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a buy yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a buy yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Check out which internet software and services companies made the list. And when you're done, be sure to read about which highly volatile tech stocks to buy now. Year-to-date returns are based on June 12, 2015, closing prices. The highest-rated stock appears last.JCOM data by YCharts
3. j2 Global, Inc. (JCOM)
Rating: Buy, A-
Market Cap: $3.2 billion
Year-to-date return: 8.5%
j2 Global, Inc. engages in the provision of Internet services worldwide. It operates through two segments, Business Cloud Services and Digital Media.
"We rate J2 GLOBAL INC (JCOM) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance, reasonable valuation levels, expanding profit margins and good cash flow from operations. We feel its strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth came in higher than the industry average of 5.7%. Since the same quarter one year prior, revenues rose by 20.2%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Compared to its closing price of one year ago, JCOM's share price has jumped by 40.78%, exceeding the performance of the broader market during that same time frame. Turning to the future, naturally, any stock can fall in a major bear market. However, in almost any other environment, the stock should continue to move higher despite the fact that it has already enjoyed nice gains in the past year.
- The gross profit margin for J2 GLOBAL INC is currently very high, coming in at 85.19%. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of 13.56% trails the industry average.
- Net operating cash flow has increased to $45.72 million or 22.58% when compared to the same quarter last year. Despite an increase in cash flow, J2 GLOBAL INC's cash flow growth rate is still lower than the industry average growth rate of 41.25%.
- You can view the full analysis from the report here: JCOM Ratings Report