2014 Looks Bright for Google, Facebook, and Yahoo!
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Digital advertising is the next frontier for ad men. The industry will take an increasing share of global advertising revenue as user-driven metrics help advertisers understand the effectiveness of their marketing strategy. Digital advertising will eventually become the most common way to advertise in the 21st century.
The global advertising market is expected to grow by a modest 3% in 2013, with growth expected to improve in the 2014 fiscal year to a 6.1% rate (the 2014 growth rate is based on stabilization in European economies, paired with growth in emerging economies). The growth will be driven by double-digit growth in digital advertising and will also include declining demand for newspaper (-3.3% year-over-year) and magazine (-5.1% year-over-year) advertising.
How to position
Digital advertising is unquestionably on the rise, but this is likely to be driven by mobile ads going forward. The companies best positioned for this changing market include Google (NASDAQ: GOOG), Facebook (NASDAQ: FB), and Yahoo! (NASDAQ: YHOO). These three companies’ operate at scale and offer compelling advertising solutions for companies that want to market products online.
The Google investment thesis
There are a variety of reasons for why investors should stick with Google. The company's global search ads have grown by 18% year-over-year. Its ad revenues could accelerate in fiscal year 2014 based on the projection from Magna Global. The company’s revenues grew by 31% year-over-year on a consolidated basis and will be sustained by mobile applications and mobile ad sales going forward.
Google’s trouble with the mobile market is that it is losing mobile search revenue on both Microsoft's and Apple’s phones. Google makes up for this loss with Android Play Store sales, however. Google’s trouble in mobile is losing mobile search revenue on both Microsoft and Apple’s phones. Google makes up for this loss with sales from the Google Play Store on Android devices, however.
According to IDC, the smart phone market is projected to grow by 25% on average until 2016. Gartner estimates that the tablet market will grow from 125 million units in 2012 to 375 million in 2016. In the coming decade, I estimate that Google will maintain more than 40% of the global mobile market share. Based on these growth rates and market share predictions, the company’s search revenue from mobile paired with sales from the Google Play Store will give the company significant growth for years to come. Currently, Google generated $2.2 billion in revenue from the Play Store in the first quarter alone. The revenue growth in application sales will grow in the double digits for quite a while, and I anticipate growth rates to stay above 20% per year over the next five years.
Facebook could be a winner
The company recently launched its hash-tagging service, giving it the leverage it needs to fight off openly social environments on the Internet.
I believe that Facebook will remain the most dominant social network. The problem lately has been a lack of certainty behind the company’s mobile strategy. Mark Zuckerberg talked about monetizing mobile with advertising in the annual shareholder meeting. But what I really think he’s up to is creating add-on services and alternative ways to monetize Facebook Mobile.
Analysts have mixed feelings over Facebok’s growth initiative. The company’s spending on research and development grew by 871.5% since the IPO. This spending isn’t going to have a guaranteed success rate, as was proven by the high-profile failure of Facebook Home.
Going forward, investors should be loading up on the stock rather than looking to make a quick buck. This is because it is not going to stage a significant rally until the company has found new ways to monetize Facebook mobile or created other unique products that have significant monetizing capability.
Yahoo! the famous hedge fund
Okay, it is a bit of an exaggeration to call Yahoo! a hedge fund. But let’s not deny the company’s success at acquiring companies. Examples of this would include Alibaba.com, which worked out into a significant return on investment (Yahoo!'s stake in Alibaba was sold at $7.1 billion, while the company’s entry point was $500 million.)
In its most recent quarterly earnings announcement, Yahoo! was able to grow the number of paid clicks it received by 16%, though the growth was offset by a 7% decline in the price per click. What’s more interesting, though, is the expectation of stabilizing ad spending from developed markets in 2014, based on the earlier ad statistic from Magna Mobile. Based on the aforementioned projections, it is likely that the price per click will stabilize. Companies in developed markets (Europe) will feel more confident and will spend more, thus leading to a price hike on ads.
Going forward, analysts on a consensus basis anticipate the company to grow earnings by 13.53% on average over the next five years. The growth in earnings is likely to be sustainable based on the company’s acquisition strategy, economic headwinds, and cost-cutting efforts.
Google, Facebook, and Yahoo! are attractive growth investment vehicles. I really like Yahoo!’s bottom-line growth strategy and believe that it has a lot of potential going forward. Google, on the other hand, has a diversified set of business segments and complements diversification with high rates of revenue and net income growth. Facebook will remain the most dominant social network, and has the up-side surprise of creating new products or using rapid cost-cutting to stimulate net income growth.
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Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!