The ongoing digitization of the globe is expected to continue as an increasing number of consumers and businesses move online. This requires facilitating products, services and infrastructure that are provided by the extremely diverse Internet – Services industry. While this diversity makes it somewhat difficult to identify drivers that may be applicable to all players, a stronger economy is generally positive. Therefore, the ongoing war and declining consumer confidence (mainly related to tariffs, inflation and jobs) may be considered negative.
Our picks are Inuvo (INUV) and Shopify (SHOP) because these are high-quality businesses with innovative technology that may be able to continue growing despite macro headwinds. Inuvo is a riskier bet because of its size but Shopify has an attractive competitive moat that is hard to replicate. Both have AI at the heart.
Most industry players are heavily investing in artificial intelligence and machine learning as this allows them to provide additional features and differentiate their offerings. Being a capital-intensive industry with high fixed cost of operation and the fairly constant need to build infrastructure, a high interest rate isn’t conducive to business growth. Therefore, a hawkish Fed is just not very good news for the Internet Services industry.
Valuation has come down significantly over the past six months, which along with rising estimates indicate the existence of opportunities.
About the Industry
Internet - Services companies are primarily those that rely on huge software and hardware infrastructure, referred to as their properties, to deliver various products, services and infrastructure to individual or corporate consumers. Given the increased digitalization of the world and the industry’s role as a digital enabler, the range of offerings is very broad and may include ecommerce, search, social networking, cloud-based software, collaboration and business productivity solutions.
Companies generally operate two models: ad-based and ad-free (subscriptions, licenses, usage-based, fees-based). Alphabet, Baidu and Akamai are some of the larger players while Crexendo, Upwork, Dropbox, Etsy, Shopify, Uber, Lyft and Trivago are some of the emerging players. Very large players (mainly Alphabet) tend to skew averages.
Factors Determining Industry Performance
- Data is central to success in this industry, as it allows the players to build artificial intelligence (AI) models to improve the quality of services, create new technologies and services, and also to lower the cost of operation. AI is changing the way these companies operate: search is becoming conversational, content creation is becoming automated, AI agents are performing various tasks and personalized recommendations are now available at scale. Internet service providers are also able to differentiate their products based on the scale, flexibility and choice in AI-powered tools that they offer. The market is extremely competitive and smaller tools are getting commoditized. User interfaces across the web are being redesigned to adopt these changes. Larger companies often have the edge in AI because they have access to larger data sets that can be processed to further develop their AI.
- Secular growth drivers continue to play out. Digitization is increasing across the world, meaning that both work and entertainment continue to move online, leading to increasing Internet penetration, cloud adoption and mobile commerce. At the same time, international borders are increasingly melting away, driving cross-border flow of goods and services. This represents huge growth potential. Gen Z and younger populations are accustomed to doing most things online, which means that this trend can only accelerate. As digitization redefines identities, relationships and transactions, it will create both opportunities (like security software) and risks (like privacy concerns and increased competition).
- Being a capital-intensive industry, there is the need to raise funds to build out costly infrastructure. Funds are also needed to maintain this infrastructure. Given the secular growth prospects, companies have continued infrastructure investments through 2023, 2024 and 2025 despite high interest rates. Rates are unlikely to come down this year, as persistent inflation and volatile energy prices have made the Fed incrementally cautious. Ex-Alphabet PP&E displays some seasonality although the trend continues to swing upward, meaning that companies are investing heavily in their infrastructure.
Zacks Industry Rank Indicates Improving Prospects
The Zacks Internet - Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #152, which places it among the bottom 38% of 245 Zacks-classified industries.
The group’s Zacks Industry Rank, which is basically the average rank of all the member stocks, indicates that constituent companies may be undergoing some difficulties. Improvement over the last three months is encouraging.
Looking at the aggregate earnings estimate revisions over the past year, there have been significant improvements in both the 2026 and 2027 estimates. However, while the 2026 estimates have improved more or less consistently, the 2027 estimate dipped slightly in July, after growing steadily through the past year. As a result, the aggregate estimates for 2026 and 2027 are up a respective 89.3% and 21.2% from the August 2025 level.
Historically, the top 50% of Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. So the industry being in the bottom 50% indicates that investor sentiments remain muted.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Stock Market Performance Remains Strong
Over the past year, the industry has consistently returned far more than both the broader Technology sector and the S&P 500. The industry’s net gain of 82.2% over the past year is more than double the broader sector’s gain of 34.8% and nearly 3X the S&P 500’s 28%.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry Valuation Reasonable
On the basis of forward 12-month price-to-earnings (P/E) ratio, we see that the industry is currently trading at a 21.58X multiple, which is a discount to its median value of 25.74X over the past year. However, since the S&P 500 trades at 20.59X and the sector trades at 21.96X, the industry appears reasonably valued. Overall, the industry has traded between a low of 20.57X and a high of 29.72X over the past year, at a premium to the S&P 500 but a discount to the sector at both points.
Forward 12 Month Price-to-Earnings (P/E) Ratio
Image Source: Zacks Investment Research
2 Solid Bets
The Internet Services industry is not in a good place at the moment because of an uncertain macro, wars, as well as persistently high interest rates. Since the industry is highly diverse, there’s the possibility that some players would be doing exceedingly well while others not so much. We currently have a Zacks #1 (Strong Buy) rating on Inuvo (Z) and a Zacks Rank #2 (Buy) rating on Shopify (SHOP) discussed below.
Inuvo, Inc. (INUV): Little Rock, Arkansas-based Inuvo provides AI-based adtech directly to brands, as well as to advertising agencies and integrated platforms. IntentKey, its flagship patented technology, reads the open web to match context with reader sentiment and thus determine buying intentions, bypassing the traditional dependence on cookies and other markers. Its Bonfire digital media platform, builds and manages a portfolio of owned and operated consumer websites that attract digital traffic. Because of the in-built bot filter, this traffic represents high-quality clicks for advertising platforms and search networks.
The adtech industry is undergoing structural changes because of growing concerns about customer profiling by digital players. Privacy is highly debated today, regulators are creating policy frameworks (like GDPR and CCPA) that increasingly limit the operation of identifiers and digital platforms are adopting these changes. The resultant increase in demand for compliant technology puts IntentKey at the center of this marketplace worth hundreds of billions of dollars annually.
As an early provider, Inuvo could quickly gain market share before competing technologies catch up. The platform generated encouraging 13% growth in the first quarter and we may expect this momentum to continue in the foreseeable future. Its SaaS-based self-service platform, launched early last year allows marketers to independently visualize, build and operationalize AI audience models. As IntentKey (Audience Modeling) adoption gathers momentum, there will be a corresponding positive impact on profitability, as dependence on the lower-margin Bonfire (Legacy Search) offering declines. This strategy is clearly working at the moment, seen from the last quarter’s results: The company was able to post a 13-cent EPS (up from a 10-cent loss a year ago) despite a 70% year-over-year decline in revenue.
We should, however, keep an eye on the evolving situation, as there is a permanent deterioration in search monetization economics (which still contributes the lion’s share of revenue), as this decline may therefore be insufficiently offset by the growing Audience Modeling business.
In the last quarter, the company beat earnings estimates (single analyst) by 35 cents (159%) with the preceding four-quarter average surprise sitting at around 57%. The 2024 loss estimate has been halved from 24 cents to 12 cents and the expected loss for 2027 is 23 cents.
The shares of this Zacks Rank #1 (Strong Buy) stock have depreciated 91% over the past year.
Price and Consensus: INUV
Image Source: Zacks Investment Research
Shopify, Inc (SHOP): Ottawa, Canada-based Shopify provides a comprehensive commerce platform for small to enterprise-scale brands that wish to remain independent of marketplaces like Amazon. The platform includes online shop fronts, inventory listing and management, shipping, payments, finance and other services required to carry on a successful business across digital and physical formats. Its biggest competitive moat is the app ecosystem it has developed that makes it hard for most other tech players to replicate. A significant part of the automation it offers is through its suite of AI tools, including Shopify Magic and its AI assistant, Sidekick.
While the company doesn’t buy or sell any products, it benefits from the secular shift in buying habits from physical to digital, with a significant growth runway. Also, despite being a tech company, its focus on the retail vertical makes it subject to retail sector dynamics.
Revenue is increasingly being driven by Merchant Solutions rather than Subscriptions, as Shopify’s compelling offerings create a sticky customer base and increases switching costs. This is leading to continued strong (20%+) revenue growth. The company’s performance across larger vendors (Shopify Plus), international markets and physical formats are supporting this growth. At the same time, recent restructuring actions have made the company more profitable, allowing continued investments in AI.
There’s no denying that Shopify has a solid, high-quality business with significant growth potential. What concerns us is the role that AI is playing in lowering the cost of building online stores and commerce software, which would enable other players to enter the space and drive increased investments in innovation to stay ahead. Also, Shopify’s growing size may eventually make it harder to generate the growth rates that investors are accustomed to. Shrinking growth rates and increasing competition could hit the share price hard, as expectations remain high and the valuation is rich.
Shopify topped estimates in the last quarter, with earnings beating by 12.5%. The 2026 estimate increased a couple of cents (1.1%) in the last 30 days while the 2027 estimate increased 6 cents (2.7%). At these levels, they represent a 27.4% increase in revenue and a 57.3% increase in earnings for 2026 and a 22.7% revenue increase and 22% earnings increase in the following year.
The shares of this Zacks Rank #2 (Buy) stock have lost 4.4% of their value over the past year.
Price and Consensus: SHOP
Image Source: Zacks Investment Research
Research Chief Names "Single Best Pick to Double"
From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.
This company targets millennial and Gen Z audiences, generating nearly $1 billion in revenue last quarter alone. A recent pullback makes now an ideal time to jump aboard. Of course, all our elite picks aren’t winners but this one could far surpass earlier Zacks’ Stocks Set to Double like Nano-X Imaging which shot up +129.6% in little more than 9 months.
Free: See Our Top Stock And 4 Runners UpWant the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Inuvo, Inc (INUV): Free Stock Analysis Report
Shopify Inc. (SHOP): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
Zacks Investment Research
