Dropbox, Crexendo Remain Our Top Picks in Internet Services

The Internet Services industry presents an attractive investment opportunity, currently trading at a discount to the S&P 500 and broader tech sector on a forward P/E basis, while demonstrating a 29.9% gain over the past year. Despite macro challenges, the capital-intensive sector is bolstered by significant AI investments, increasing digitization, and an improved Zacks Industry Rank. Zacks highlights Dropbox (DBX) and Crexendo (CXDO) as top picks, driven by their strategic AI integration, cost-cutting measures, and robust financial performance, with Dropbox beating earnings by 19.5% and Crexendo by 75% last quarter, both projecting continued earnings growth.

Analysis

The Internet-Services industry exhibits a compelling investment profile, having outperformed both the S&P 500 and the broader technology sector with a 29.9% gain over the past year. Despite macroeconomic headwinds like inflation and high interest rates, the industry's valuation remains attractive, with a forward 12-month P/E ratio of 21.24X representing a discount to the S&P 500's 22.8X and the tech sector's 27.63X. Improving fundamentals are indicated by its Zacks Industry Rank advancing into the top 40% and a 14.1% increase in aggregate 2025 earnings estimates over the past year. Growth is fueled by heavy investment in AI, increasing digitization, and the potential for future interest rate cuts, which would be a significant tailwind for this capital-intensive sector. Two highlighted buy-rated firms, Dropbox (DBX) and Crexendo (CXDO), exemplify these trends. Dropbox is focusing on profitability through AI integration and cost-cutting, including a 528-employee reduction, which contributed to a 19.5% earnings beat last quarter; it projects 7.6% earnings growth in 2025 despite an anticipated 2.2% revenue decline. Crexendo posted a more impressive 75% earnings beat and projects robust 2025 growth with revenue up 11% and earnings up 26.9%, driven by its niche market strategy and a cost-saving migration to Oracle Cloud Infrastructure (OCI).

Key Decisions for Investors

• Given the industry's attractive valuation and improving earnings outlook, investors should consider selective exposure to the Internet-Services space, focusing on companies with proven AI integration and clear cost-efficiency roadmaps.
• Crexendo (CXDO) warrants consideration for a long position by growth-oriented investors, based on its significant 75% earnings beat, strong double-digit revenue and earnings growth projections for 2025, and strategic positioning in a niche UCaaS market.
• For Dropbox (DBX), a more cautious stance is warranted; while cost-cutting and projected 7.6% earnings growth are positive, the forecasted 2.2% revenue decline for 2025 is a key risk, and investors should monitor the monetization of its AI platform as an indicator for a return to top-line growth.
• Investors should closely track macroeconomic indicators, as potential interest rate cuts would serve as a significant catalyst for the capital-intensive sector by lowering the cost of funding for infrastructure investments.