Emerging Themes in the Internet Sector

Ishfaque is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Internet companies are consistently viewed as hot stocks mainly due to the hyper growth trajectories of select companies that have been very disruptive. They have altered the way we look for information and communicate with users around the world. As is often the case, power is very concentrated in the hands of a few companies, and over time, these companies will become even more influential and earn outsized returns.

Advertisers are increasingly shifting towards online from traditional outlets; users are increasingly adopting mobile based devices to access the Internet and other digital media content. With faster internet speeds right around the corner (think Google Fiber), and the sector will only increase in prominence down the road.

 Key Investment Themes In the Internet Space:

1. Video Streaming Companies Will Become Major Entertainment Outlets

Due to secular changes in the industry, online video streaming companies will be major beneficiaries at the expense of Cable TV. The rapid adoption of internet-enabled devices will contribute to a more fragmented digital media consumption patterns. 

"Over the top'' services like Netflix (NASDAQ: NFLX), Amazon, and Hulu will do very well. As many of the subscribers of these companies are a lot more likely to cut or even not possess a cable subscription. Netflix, Amazon and Hulu are now producing their own original content shows as well, which differentiates their service offering.

2. eCommerce to Play an Even Bigger Role

Consumers are increasingly becoming more and more comfortable shopping online. This trend has started to proliferate not only in developed markets, but also in developing countries as well. Major eCommerce companies like Amazon, eBay (NASDAQ: EBAY) Alibaba group should do very well, as they continue to gain market share at the expense of brick-and-mortar companies like Best Buy and Barnes & Noble. 

3. Mobile Devices Are Overshadowing PCs

Firms with solid positions in mobile will be in pole position, as consumer's internet consumption drastically shifts from the Desktop to Mobile. Smartphone sales led by Samsung and Apple (NASDAQ: AAPL) have already overtaken PC sales.  And tablets sales are widely expected to follow by mid-2013, with the iPad and the Kindle Fire leading the way. In addition, Facebook reported that for the first time Daily Users on Mobile exceeded Daily Desktop users.

As a result, these hardware companies are constantly improving their online content ecosystem with newer content to stay ahead of the competition.

4. Consumer Review Platforms to Gain Prominence

The circulation of most newspaper and other print information outlets like magazines and yellow-pages are on the decline, and paves the way for consumer review platforms to earn more revenues. Consumer review sites like Yelp and travel information platform, TripAdvisor along with medical information platform, WebMD are all seeing large increases in the number of visitors.  

5. Increased Pace of Innovation

Higher R&D budgets and more experiments will pave the way for newer internet based products and services that will be rolled out in the near future. Newer companies and startups with more disruptive products and services will emerge and also aid substantially on added innovation.

The next Google or Facebook just might be taking those early steps tucked away in some basement. Also many of these startups will be gobbled up by the bigger cash rich technology giants.  

6. Emphasis on Local Dollars

Many major Internet companies like Amazon and Google (NASDAQ: GOOG) are increasingly ramping up their offerings to be the recipient of local advertising dollars as well as from daily deals. These companies are looking to tap into the huge local market that is largely untapped, and will be competing even more with companies like Yelp and Groupon

7. Social Media Will Become More Prominent

Consumers’ choices are increasingly becoming more social. Social media sites like Facebook, LinkedIn, Twitter, Instagram, Tumblr are becoming increasingly more valuable. With very high growth in the number of visitors, these companies will become more important in the coming years, as advertisers are heavily after user balls. 

Facebook (NASDAQ: FB) leads the pack, as it is accountable for more than 5 out of 6 minutes being spent in these social networking sites in the U.S., according to comScore.

8. Payments Will Be More Digital and Mobile

Consumers are increasingly becoming more comfortable with making payments online and via mobile. eBay and its PayPal subsidiary processed total payments on mobile devices of more than $14 billion in 2012, and expects to process at least $20 billion in 2013.

In addition, digital wallets like Google Wallets and Visa's V-Me are expected to gain more momentum as users increasingly utilize mobile based payments. 

9. Advertising Budgets Shifting

Consumers are increasingly accessing information through the Internet. As a result, consumers are largely consuming videos and reading news through their iPads or Kindles. Advertisers are rapidly shifting their advertising budgets from traditional outlets like TV and Newspapers to high traffic online outlets like Facebook and YouTube.

10. Emerging Market Names Will Grow Bigger

Increased internet penetration along with faster connectivity speeds in most parts of the world will lead to new winners in the technology space. Numerous regional winners in the Internet and technology space will emerge spanning various BRIC markets.

The likely beneficiaries in the e-Commerce space will be Alibaba and the “Latin eBay” MercadoLibre. In the search engine space, Yandex, Baidu and Qihoo will respectively engage in more heated competition to fend off bigger rivals like Google, Microsoft and Yahoo in their own respective markets.

The Takeaway

A handful of these companies will do phenomenally well over the next 5 or 10 years. The ones that constantly indulge themselves on innovating and recreating newer themes will outperform the broader market as well. 



ishfaque has no position in any stocks mentioned. The Motley Fool recommends Apple, eBay, Facebook, Google, and Netflix. The Motley Fool owns shares of Apple, eBay, Facebook, Google, 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!

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