How to Profit from Growth in Internet Advertisement

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

The entire technology sector has gone through a radical transformation with the rapid popularity of handheld devices. This has improved the prospects of the Internet advertisement industry. The increased ‘portability of computing’ has significantly increased the amount of time spent online. Understandably, this also increases the attractiveness of Internet as medium of advertisement. According to research by PWC, Internet advertisement revenues grew by 21.9% between 2010 and 2011, i.e. from $26 billion to $32 billion. The sell side estimates that Internet revenues would exceed $40 billion in 2013.

This rapid growth in advertisement revenues increases the attractiveness of stocks that derive revenues from the Internet. Google (NASDAQ: GOOG), Facebook (NASDAQ: FB), eBay (NASDAQ: EBAY) and AOL (NYSE: AOL) are leading players in this arena and would be the biggest beneficiaries of this revolution. The biggest challenge is the ability to monetize mobile traffic. In this regard Facebook has been the most successful amongst major industry players. As this industry grows it will face legal barriers related to the amount of responsibility a company undertakes when publishing a third party advertisement. Therefore, Google’s recent success in Australian courts is a major breakthrough for all companies dependent on internet advertisement revenues.  

Industry Potential

As we can see in the table below, the growth rates are pretty good. The industry potential is also reflected in the amazing returns these stocks have shown. One exception is Facebook because the stock has gone public only recently and the current price doesn’t reflect the real potential of the company. The social giant might be the biggest stakeholder in Internet advertisement growth because it takes a lead on Google due to its better mobile monetization. According to recent quarterly results, Facebook now gathers 23% of all its revenues from mobile, giving it an edge over peers.

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>P/e</strong></p> </td> <td> <p><strong>5Y-Revenue Growth</strong></p> </td> <td> <p><strong>PEG</strong></p> </td> <td> <p><strong>1-Y return</strong></p> </td> <td> <p><strong>5-Y return</strong></p> </td> </tr> <tr> <td> <p><strong>eBay</strong></p> </td> <td> <p>17.8x</p> </td> <td> <p>12.90%</p> </td> <td> <p>1.4x</p> </td> <td> <p>70%</p> </td> <td> <p>102%</p> </td> </tr> <tr> <td> <p><strong>Google </strong></p> </td> <td> <p>14.6x</p> </td> <td> <p>25%</p> </td> <td> <p>1.25x</p> </td> <td> <p>27%</p> </td> <td> <p>48%</p> </td> </tr> <tr> <td> <p><strong>Facebook </strong></p> </td> <td> <p>35x</p> </td> <td> <p>101%</p> </td> <td> <p>1.7x</p> </td> <td> <p>-26%</p> </td> <td> <p>NA</p> </td> </tr> <tr> <td> <p><strong>AOL </strong></p> </td> <td> <p>21x</p> </td> <td> <p>-15%</p> </td> <td> <p>0.8x</p> </td> <td> <p>95%</p> </td> <td> <p>57%</p> </td> </tr> </tbody> </table>



Although it still lags behind Facebook in terms of mobile monetization, Google's Android has become the largest smartphone operating system in the world. Google has still not been able to fully utilize the potential from its dominance in this arena. A major reason for this inability is that independent applications available on Google Play can publish their own offline advertisements. There is already tough competition in this space with iOS only marginally behind Android and Windows 8 hitting store shelves. All three technology giants are now controlling their own hardware as well, with Nexus already a major industry player and Surface Pro hitting store shelves this week. Although it is highly unlikely that this space will be crowded due to pretty obvious barriers to entry, it will continue to be extremely competitive amongst existing players. If Google can successfully compete with these players and keep its dominance over smartphone OS, successful mobile monetization will push its stock to the sky.  


Litigation has become a norm in this highly competitive landscape. A very important litigation has just been concluded in Australia, which might not seem as high profile as some of the lawsuits from the smartphone industry, but this particular case will have a long term impact on the entire Internet advertisement industry. An Australian watchdog recently sued Google for publishing misleading advertisements on its website. The court has ruled in favor of the search giant, which will set a precedent for all future litigation anywhere in the world. Google was able to prove that it didn’t engage in misleading behavior with its sponsored links and is not responsible for messages from paid advertisement. This makes all such Internet advertisement companies carriers of information and not published, thereby removing the burden of due diligence.

Bottom Line

The Internet advertisement industry will continue to show solid growth, and the mentioned stocks are a good bet to profit from this growth. Google and Facebook are the strongest contenders in this arena, but Facebook has a clear edge when it comes to mobile. AOL is slowly building itself to be a serious contender in this arena, and eBay has Paypal to fall back on, making both stocks interesting investment options. 

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