Whether it be online shopping or social media, the secular forces propelling consumer internet businesses are marching along with little hesitation. These paradigm shifts are not only fostering new habits but also unlocking the next leg of growth for the industry, which has gained 25.6% over the past six months while outpacing the S&P 500 by 15.5 percentage points.

Although these companies have produced results, only those with the widest moats will survive as new red-hot players pop up regularly to take their slice of the pie. Keeping that in mind, here are three consumer internet stocks we’re steering clear of.

Revolve (RVLV)

Market Cap: $2.34 billion

Launched in 2003 by software engineers Michael Mente and Mike Karanikolas, Revolve Group (NASDAQ:RVLV) is a fashion retailer leveraging social media and a community of fashion influencers to drive its merchandising strategy.

Why Are We Wary of RVLV?

1. Decision to emphasize user growth over monetization has contributed to 9.5% annual declines in its average revenue per buyer
2. Overhead has increased over the last four years as its EBITDA margin fell by 7 percentage points
3. Performance over the past three years shows its incremental sales were much less profitable, as its earnings per share fell by 22.4% annually

At $33.51 per share, Revolve trades at 35x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than RVLV.

Chewy (CHWY)

Market Cap: $13.89 billion

Founded by Ryan Cohen, who later became known for his involvement in GameStop, Chewy (NYSE:CHWY) is an online retailer specializing in pet food, supplies, and healthcare services.

Why Do We Think Twice About CHWY?

1. Estimated sales growth of 7.4% for the next 12 months implies demand will slow from its three-year trend
2. Bad unit economics and steep infrastructure costs are reflected in its low gross margin of 28.6%
3. Lacking free cash flow generation means it has few chances to reinvest for growth, repurchase shares, or distribute capital

Chewy is trading at $34 per share, or 23x forward EV-to-EBITDA. If you’re considering CHWY for your portfolio, see our FREE research report to learn more.

Wayfair (W)

Market Cap: $5.59 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 Do We Steer Clear of W?

1. Struggled to engage its audience as its active customers averaged 5% declines
2. Sales were less profitable over the last three years as its earnings per share fell by 60.3% annually, worse than its revenue declines
3. 6× net-debt-to-EBITDA ratio shows it’s overleveraged and increases the probability of bankruptcy if things unexpectedly turn

Wayfair’s stock price of $44.65 implies a valuation ratio of 9.2x forward EV-to-EBITDA. Dive into our free research report to see why there are better opportunities than W.

Stocks We Like More

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