Yahoo Finance

Consumer internet businesses are redefining how people engage with the world by giving them instant connectivity and convenience. Luckily for them, the market seems to believe there is a long runway for growth as the industry has recorded a 1.6% gain over the past six months while the S&P 500 shed 2% of its value.

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. Taking that into account, here is one internet stock poised to generate sustainable market-beating returns and two we’re steering clear of.

Two Consumer Internet Stocks to Sell:

Nextdoor (KIND)

Market Cap: $578.5 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. Customer spending has dipped by 1.1% on average as it focused on growing its users

2. Poor expense management has led to EBITDA losses

3. Cash-burning tendencies make us wonder if it can sustainably generate shareholder value

At $1.52 per share, Nextdoor trades at 2.7x forward price-to-gross profit. Check out our free in-depth research report to learn more about why KIND doesn’t pass our bar.

Skillz (SKLZ)

Market Cap: $83.65 million

Taking a new twist at video gaming, Skillz (NYSE:SKLZ) offers developers a platform to create and distribute mobile games where players can pay fees to compete for cash prizes.

Why Are We Out on SKLZ?

1. Paying Monthly Active Users have declined by 41.7% annually over the last two years, suggesting it may need to revamp its features or user experience to stay competitive

2. Inability to adjust its cost structure while its revenue declined over the last few years led to a 17.7 percentage point drop in the company’s EBITDA margin

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

Skillz’s stock price of $5 implies a valuation ratio of 1.2x forward price-to-gross profit. Read our free research report to see why you should think twice about including SKLZ in your portfolio, it’s free.

One Consumer Internet Stock to Buy:

MercadoLibre (MELI)

Market Cap: $116.3 billion

Originally started as an online auction platform, MercadoLibre (NASDAQ:MELI) is a one-stop e-commerce marketplace and fintech platform in Latin America.

Why Is MELI a Good Business?

1. Unique Active Users are rising, meaning the company can increase revenue without incurring additional customer acquisition costs if it can cross-sell additional products and features

2. Grip over its ecosystem is highlighted by its ability to grow engagement while increasing the average revenue per user by 18.3% annually

3. Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends, and its growing cash flow gives it even more resources to deploy