The large-cap U.S. internet industry has seen very strong gains from its March 2020 lows, and there are still opportunities for investors to capitalize on a mixture of growth, free cash flow dynamics and capital allocation, according to an analyst at Goldman Sachs.
Analyst Eric Sheridan identified the top 10 themes for the U.S. internet sector that could fuel growth in some of these stocks in 2021 and beyond.
1. Blurring Line Between Commerce & Advertising: Amazon.com, Inc.'s AMZN demand generation and video advertising strategies, the rise of social shopping, marketplace models supplementing core revenue with ad revenue and the rise of seller marketplace models are all underlining the blurring of the lines between traditional digital advertising and e-commerce business models over the past two years, the analyst said.
Beneficiaries: Amazon, Facebook, Inc. FB, with its namesake platform and Instagram, Pinterest Inc PINS, Alphabet Inc GOOGLGOOG and Snap Inc SNAP.
2. Rise of Creator Economy: Unlike the rise of the social media news feed, the rise of creator tools, monetization aspects and the role of the "influencer" has created a new industry dynamic, Sheridan said.
Platforms embracing this shift are gaining time spent but have to share the unit economics of that traffic monetization with the content creator, he added.
Google's YouTube, the analyst said, is maintaining its relevance due to its global scale and monetization split. Rise of newer platforms such as TikTok and Cameo is likely to disrupt some of the time spent, he added.
Beneficiaries: Facebook, Alphabet (Google), Pinterest and SnapChat
3. Streaming Media Platform Reaching Global Scale: Streaming media, including video and audio, will likely maintain much of the subscriber growth gains, Sheridan said.
Beneficiaries: Netflix Inc NFLX, Spotify Technology SA SPOT and Amazon
4. Local Commerce Activity Shifting Online: There has been a noticeable uptick in local e-commerce activity, such as food delivery, ship from store, and buy online and pick up in-store all became more normative consumer behaviors, the analyst said.
Beneficiaries: Amazon, Uber Technologies Inc UBER, DoorDash Inc DASH and Lyft Inc LYFT
5. Subscriptions Becoming Hallmark of Consumer and Platform Utility: Despite lower per order economics tied to subscriptions, most companies have recently adopted this strategy as a means to drive higher retention, higher engagement/frequency of use, and greater LTVs with the potential to raise prices as they deliver more value to the consumer, Sheridan said.
Beneficiaries: Amazon, Spotify and Netflix
6. Growth and Competitive Landscape for Cloud Computing: Broader adoption of cloud computing services by enterprise customers has reached a tipping point due to broad-based increases of digital spending and shifts in IT budgets toward cloud adoption, the analyst said.
"We see revenue growth for the sector set to maintain healthy levels in the coming quarters as revenue backlog growth for public cloud providers has surprised to the upside over the past 12 months," Sheridan said.
Beneficiaries: Amazon, Alphabet (Google)
7. Augmented Reality Becoming The Next Computing Wave: Repositioning key consumer/enterprise offerings to evolving media consumption applications such as gaming, avatars, attending sports/concerts, exercise seems like the next logical shift in consumption patterns, Sheridan said.
Friction points include hardware form factor, broadband connectivity and mass appeal use cases, but tech operators are planning and investing toward platform evolution in this direction, he added.
Beneficiaries: Facebook, Snapchat
8. Localization of Online Travelling: Ahead of the pandemic, the travel industry was plagued by slower growth, continued high levels of competition and debates around marketing leverage, Goldman said.
Although in the short- to medium-term, companies could benefit from a series of easier comps from the pandemic year, many of those same issues remain for the sector, the firm said.
Relative exposure to the fastest growing areas of the industry such as shared/alternative accommodations and under-penetrated geographies/sub-segments of travel will allow some players to outgrow their peers, the firm added.
As the internet economy becomes more personalized and consumers have incrementally more flexible working environments, some aspects of the online travel experience are likely to garner more attention and wallet share from global consumers, Goldman said.
Beneficiaries: Booking Holdings Inc BKNG, Expedia Group Inc EXPE and Airbnb Inc ABNB
9. Regulation Impacting Costs: One of the persistent themes of recent years has been the rise of government focus on the business practices of the industry's scaled players, Sheridan said. The analyst sees three potential dynamics — news of investigations and fines, new rules proliferate; rising compliance costs; and headwinds to any in-market consolidation or strategic M&A by large players.
"We believe investors have largely priced in these potential operating headwinds," the analyst said.
Beneficiaries: Facebook, Amazon and Alphabet (Google)
10. Rise of Decentralized Web: The defining characteristics of a Web 2.0 "winner" are the scale of users, utility-like nature to mobile/desktop applications/services and low to no distribution costs, Sheridan said. The Web 2.0, characterized by a shift from desktop to mobile computing and from local to cloud storage, is in the later innings of the innovation curve, he added.
The analyst sees dramatic shifts in the industry trends in Web 3.0, with decentralized, less global scaled platforms, more local or niche, etc.
Beneficiaries: Large established players are beneficiaries of this theme, the analyst said.
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