Future Internet Trends That Investors Cannot Ignore
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Spending time on the internet has become one of people's favorite activities in the United States. It’s becoming almost as popular as watching television.
In total, people spend three hours and six minutes online per day, which grew from two hours, and thirty-four minutes in the year ago period. Comparatively speaking, the average person spends five hours in front of a television. So I guess we know where 8 hours of our day goes.
That being the case, capitalizing on the growing usage of the internet couldn’t be more imperative. Social networking has become the most dominant activity on the internet at 37 minutes. The other opportunities include online video at 24 minutes, and search at 22 minutes.
With the average person spending more time on the internet, we can look to three sources for making money as investors: social networking, search, and video.
LinkedIn (NYSE: LNKD) may have some significant potential as a social network. It is becoming increasingly important for people to create work profiles on a social network. LinkedIn provides resources and tools for the average consultant and corporate head hunter. In this day and age it is more important than ever to poach serious talent, find people to close business deals, and to advertise products.
LinkedIn has been able to experience significant growth in all of its business segments. Analysts on a consensus basis anticipate that the company will grow earnings by 64% in 2013 and 44.50% in 2014. Forecasts indicate that the company will double earnings in under two years, which is what’s driving the 560 price-to-earnings multiple. The multiple is likely to fall as investors pay less of a premium on growth as the rate of growth declines.
Google (NASDAQ: GOOG) is way ahead of the competition in terms of search advertising. In the first quarter the company reported 18% growth in search and display advertising. The company has a near dominant position in terms of web browser usage globally (Chrome and Mozilla Firefox combined). Because of this, Google has seen upper-teen-growth in its Google AdWord and AdSense business.
The growth in its ad-business will be driven by international expansion. Microsoft estimates that the number of internet users will grow to 4 billion. Another growth catalyst is the year-over-year increases in internet usage by the average person. With the total addressable market improving, and the average audience metric likely to improve, Google’s search business will remain a cash cow for the foreseeable future.
Analysts are willing to estimate that Google’s sales will grow by 41.2% in the 2013 fiscal year. Following that the company should be able to grow sales by 16.9%. The company trades at a 26.9 earnings multiple, which is fairly high, but given enough time the multiple is likely to be justified because of its rapidly growing Android business.
Go with online video
Netflix (NASDAQ: NFLX) seems to be on the right track with its business. Again, while it is true that content costs are on the rise, the company has been able to tie up some long-term contracts with Walt Disney and DreamWorks Animation. It is highly probable that Netflix’s content collection will remain superior to its competitors.
Historically, the company has been able to increase the amount of revenue at a faster rate than the cost of acquiring content and management of its business. Because of this, the company still seems to be scaling its business effectively.
The stock is 341% above of its 52-week low. The stock seems to be a little pricey at a 557.8 earnings multiple, but this is driven by the fact that the company has a lot of pent-up growth potential. The company’s $8 a month streaming subscription package has a lot of potential in both emerging and developed markets. The company could grow its subscriber base into something significantly larger as Microsoft estimates that the number of internet users will grow to 4 billion by 2020.
Analysts remain heavily optimistic about Netflix, and expect the company to grow earnings by 375.9% in the 2013 fiscal year, and to grow by 121.7% in fiscal year 2014.
The amount of internet usage has risen considerably over the previous year. Because of this, investors need to know where they should be positioned. I believe that LinkedIn may have the most upside growth, as finding employment and talent acquisition will become more important. Google’s advertising and mobile business are also like to grow at unexpectedly high rates for a prolonged period of time. Netflix comes in third because the stock trades 341% above its 52-week low. The company should be able to sustain higher rates of growth, but investors should be a little cautious of the extremely large price-to-earnings multiple. Expectations are high, and if Netflix falls short of expectations the stock could potentially crater.
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Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Google, LinkedIn, and Netflix. The Motley Fool owns shares of Google, LinkedIn, and Netflix. 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!