Whether it be online shopping or social media, secular forces are propelling consumer internet businesses forward. Luckily for them, the market seems to believe there is a long runway for growth as the industry has recorded a 29.6% gain over the past six months, beating the S&P 500 by 13.7 percentage points.

Nevertheless, investors should tread carefully as many internet companies pursue winner-take-all strategies, meaning losses can be hefty if their playbooks don’t pan out. On that note, here are three internet stocks we’re steering clear of.

Market Cap: $41.5 billion

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

Why Does EBAY Give Us Pause?

  1. Increasing competition is redirecting attention to other platforms as it failed to grow its active buyers over the last two years

  2. Underwhelming performance in both user spending and platform engagement suggests its platform is becoming less effective

  3. Costs have risen faster than its revenue over the last few years, causing its EBITDA margin to decline by 4.3 percentage points

At $90.80 per share, eBay trades at 12.7x forward EV/EBITDA. To fully understand why you should be careful with EBAY, check out our full research report (it’s free).

Market Cap: $43.13 billion

Best known for its Madden NFL and FIFA sports franchises, Electronic Arts (NASDAQ:EA) is one of the world’s largest video game publishers.

Why Do We Think Twice About EA?

  1. Lackluster 1.2% annual revenue growth over the last three years indicates the company is losing ground to competitors

  2. Anticipated sales growth of 2.2% for the next year implies demand will be shaky

  3. Day-to-day expenses have swelled relative to revenue over the last few years as its EBITDA margin fell by 6.1 percentage points

Electronic Arts is trading at $172 per share, or 14.4x forward EV/EBITDA. Check out our free in-depth research report to learn more about why EA doesn’t pass our bar.

Market Cap: $805.5 million

Helping residents figure out what’s happening on their block in real time, Nextdoor (NYSE:KIND) is a social network that connects neighbors with each other and with local businesses.

Why Are We Wary of KIND?

  1. Modest 6.5% annual growth in weekly active users over the last two years indicates potential challenges in customer acquisition and retention

  2. Poor expense management has led to EBITDA margin losses

  3. Cash burn makes us question whether it can achieve sustainable long-term growth

Nextdoor’s stock price of $1.89 implies a valuation ratio of 3.2x forward price-to-gross profit. Dive into our free research report to see why there are better opportunities than KIND.

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