By breaking down physical barriers, consumer internet businesses are reshaping how people shop, connect, learn, and play. But it’s not all sunshine and rainbows as consumer purchasing power can make or break demand. Unfortunately, the market seems to believe stormy skies are ahead as the industry has shed 30.3% over the past six months. This drawdown is a stark contrast from the S&P 500’s 1% gain.

Investors should tread carefully as only a handful of companies in this space are positioned for long-term success due to the intense competition. On that note, here are three internet stocks we’re passing on.

eBay (EBAY)

Market Cap: $41.94 billion

Originally known as the first online auction site, eBay (NASDAQ: EBAY) is one of the world’s largest online marketplaces.

Why Are We Hesitant About EBAY?

1. May need to improve its platform and marketing strategy as its 1.2% average growth in active buyers underwhelmed
2. Demand will likely be soft over the next 12 months as Wall Street’s estimates imply tepid growth of 8.4%
3. Efficiency has decreased over the last few years as its EBITDA margin fell by 3.2 percentage points

eBay is trading at $94.31 per share, or 12.3x forward EV/EBITDA. To fully understand why you should be careful with EBAY, check out our full research report (it’s free).

Wayfair (W)

Market Cap: $10.45 billion

Founded in 2002 by Niraj Shah, Wayfair (NYSE: W) is a leading online retailer of mass-market home goods in the US, UK, Canada, and Germany.

Why Are We Wary of W?

1. Intense competition is diverting traffic from its platform as its active customers fell by 2.3% annually
2. Estimated sales growth of 5.3% for the next 12 months is soft and implies weaker demand
3. Bad unit economics and steep infrastructure costs are reflected in its low gross margin of 30.2%

Wayfair’s stock price of $80.34 implies a valuation ratio of 15.3x forward EV/EBITDA. Dive into our free research report to see why there are better opportunities than W.

Chegg (CHGG)

Market Cap: $64.96 million

Started as a physical textbook rental service, Chegg (NYSE: CHGG) is now a digital platform addressing student pain points by providing study and academic assistance.

Why Do We Avoid CHGG?

1. Struggled with new customer acquisition as its services subscribers averaged 20.7% declines
2. Overall productivity fell over the last few years as its plummeting sales were accompanied by a decline in its EBITDA margin
3. Sales were less profitable over the last three years as its earnings per share fell by 71.5% annually, worse than its revenue declines

At $0.60 per share, Chegg trades at 1.9x forward EV/EBITDA. Read our free research report to see why you should think twice about including CHGG in your portfolio.

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