Although retail ecommerce is the segment that most of us are
interested in, it is in fact just a part of the overall ecommerce
market. Retailers and service providers generate just 4.7% and
3.0%, respectively of their revenues online, a slightly higher
percentage than they did in the prior year. The U.S. Census Bureau
categorizes these two segments as business-to-consumer.
According to the U.S. Census Bureau, the manufacturing sector is
the largest contributor to e-commerce sales (49.3% of their total
shipments), followed by merchant wholesalers (24.3% of their total
sales). These two segments make up the business-to-business
category.
This places the business-to-business category at 90% of total
ecommerce sales, with the balance coming from the
business-to-consumer category. The latest numbers from the Bureau
suggest that the fastest-growing segments were retail and
wholesale. [All the above data from the U.S. Census Bureau relate
to 2011, as published in May 2013.]
The industry is evolving very rapidly, so data collection and
evaluation are particularly difficult. Consequently, one has to
rely largely on surveys by both government and private
agencies.
In this section, we will discuss segments of the ecommerce market
than do not relate directly to the retail of goods, and focus
instead on travel, payments, security and advertising.
Travel
The U.S. Commerce Department expects international travel to the
U.S. to continue increasing over the next few years. Visitor volume
is currently expected to increase 3.7-4.2% a year from 2013 to 2017
leading to a 26% increase in the number of users by 2018. Visitors
from the Caribbean are expected to be the slowest-growing (1%). The
Middle East, Asia and South America are expected to grow 67%, 60%
and 52%, respectively.
The fastest growth is expected to come from China (229%), Saudi
Arabia (191%), Russian Federation (79%), Brazil (66%), Argentina
(65%) and Columbia (54%).
The Travel and Tourism industry remains one of the country’s
strongest industries, although the third quarter of 2013 (latest
available data) saw a deceleration in its growth rate. According to
the BEA, lower air passenger travel as well as all other
transportation-related commodities affected the industry during the
quarter. As a result, the industry grew 2.5% in the quarter, below
the real GDP growth of 3.6% (in the second quarter it grew 3.5%
compared to GDP growth of 2.5%).
The top travel booking sites are Booking.com, Expedia.com,
Hotels.com, Priceline.com, Kayak.com (acquired by Priceline),
Travelocity.com, Orbitz.com and Hotwire.com. Since Booking.com and
Kayak are part of
Priceline (PCLN) and both
Hotels.com and Hotwire.com part of
Expedia (EXPE),
this narrows down the top companies in the segment to Priceline,
Expedia,
Orbitz Worldwide (OWW) and Travelocity.
However, there are several others worth considering that include
Ctrip International (CTRP),
MakeMyTrip (MMYT),
TripAdvisor
(TRIP), which was spun off from Expedia, and
Qunar
(QUNR), which recently had its IPO.
Global outbound trips grew 4% in the first eight months of 2013 and
are expected to grow 4-5% this year. The Asia/Pacific region is
expected to see the strongest growth (up 9%), with China alone
growing 18%. South America will follow with 6% growth followed by
Europe at 3-4% and North America thereafter at 3% [World Travel
Monitor 2013].
According to the TravelClick North American Hospitality Review
(NAHR), both occupancy and average daily rates (ADRs) in North
America have been growing steadily through the end of 2013 and into
2014. The occupancy rate for 2013 was flattish in the Group segment
and up across most categories within the Transient segment, with
the only weakness attributable to government spending. The ADR
increased across all categories and was helped by much stronger
leisure spending. The trends going into 2014 were positive for both
occupancy and ADR.
Online travel agents (OTAs) continue to grow the fastest: up 15.2%
in 2013, according to TravelClick. The hotels’ own websites were up
7.6%, with direct walk-ins and calls to the hotel down 0.4% and
4.3%, respectively. The global distribution system used by travel
agents was up 3.5%.
Share of room nights based on actual reservations in 2013:
Smartphones are playing a key role in travel purchases, especially
for last minute purchases. eMarketer estimates for smartphone
travel researchers in the U.S. show the segment touching 50 million
or 40% of all digital travel researchers in 2013, with total U.S.
mobile travel sales touching $13.6 billion. Overall growth in
digital travel sales is expected to moderate this year, with
non-travel sales escalating. Mexico, India, Spain, Italy and Norway
are expected to have the highest shares of digital travel sales in
the next five years, with Brazil, China, India, Mexico and Italy
being the fastest growers.
The top site for travel content is TripAdvisor, visited by 60% of
Americans when choosing a hotel.
Google’s (GOOG)
YouTube is now growing in popularity and is the second in line,
according to MMGY Global's 2013 Portrait of American Travelers
study.
Another report by PhocusWright mentioned that when online
penetration of the travel market reached 35% in any country, growth
rates were likely to slow down to single-digits. The research firm
mentioned that only the U.S., U.K. and Scandinavia had reached this
level of penetration and most other markets across Europe, Asia and
Latin America would continue to show good growth rates.
Payment Systems
With practically all market research indicating solid growth in
ecommerce sales over the next few years, online players are vying
with each other to come out with convenient and secure payment
solutions. There are a host of payment systems in the market, but
the greatest progress has been made on near field communication
(NFC), quick response (QR) code, Soundwave and Bluetooth low energy
(BLE).
The latest to enter the fray is
Amazon (AMZN) with
its "Login and Pay with Amazon" system. Recognizing the most-used
mobile and computing platforms, the system works on any desktop or
tablets/smartphones running Android or iOS operating systems.
Amazon’s payment system is likely to be popular with retailers
given its huge customer base. For Amazon, it will also facilitate
further data collection and position it strongly versus
eBay’s (EBAY) Paypal and Google’s Digital
Wallet.
By far the most successful mobile payment system is Paypal, which
has come a long way from a mere online payment service. Last year,
the company inked a deal with
Discover Network
(DFS), the fourth largest credit card company, bringing its seven
million plus retailers onto the Paypal network. Paypal has also
signed up a large number of traditional retailers such as
The Home Depot (HD) and
Office
Depot (OD). The company is now selling its marketing
services as a bundled solution to retailers and the success of this
strategy is evident in Paypal’s growth numbers.
The new digital wallet from Google enables in-app purchase and
mobile payments in addition to PoS purchases and money transfer.
Other than the credit and debit card information, users can now
store loyalty cards, discount coupons and offers that they can
apply during purchase. More importantly, Google has found a way to
reduce its dependence on NFC technology. A non-NFC-enabled phone
can now use the Wallet to transfer funds from any of the accounts
saved in it.
Google now requires app developers for the Android platform to
compulsorily use its payment service instead of a competing service
from eBay or others. Despite the strong growth in Android devices,
Google Play (its app store) has not done that well, partly because
of the many steps to conversion that turns customers away. The
simplification of the checkout process should help sales on Google
Play.
Apple (AAPL) has removed NFC compatibility from
its devices and also introduced iBeacon, which is a BLE technology.
The technology tracks the approximate location of a person, the
time spent at different stores and even the location within the
store. It has the potential to push highly relevant offers and
promos at opportune moments.
Apple has accumulated a large number of patents for payment
processing and it’s very likely that that iBeacon will be rolled
into its very own iWallet. Payments on its platform are currently
handled by its Passbook system. Apple is one of the largest online
retailers although it also sells through traditional retail
outlets, so a payment platform from Apple may be expected to catch
on very fast.
The FIS Mobile Wallet from
Fidelity National Information
Services Inc. (FIS) is basically a bar code reader that
feeds information related to the purchase into the user’s
smartphone and uses it as a medium to transfer the information to
the cloud. Online purchase of merchandise is also possible. The
solution provides good security, since the transaction is carried
out entirely in the cloud through the retailer’s and banker’s
applications and personal information is not shared at the time of
purchase.
Visa (V) has also jumped on the bandwagon,
claiming that its V.me is a digital wallet with a difference. Not
only can it be used to make mobile contactless payments (bar code,
QR code or NFC), but it can also be used for online checkout (it
remembers card details from several providers).
Mobile banking is set to grow very strongly over the next few
years, according to Juniper Research. The research firm estimates
that a billion mobile devices (or 15% of the installed base) will
be used for banking transactions by 2017, up from an expected 590
million in 2013.
Most banks already have at least one mobile banking offering,
with some larger banks offering more than one option. Messaging
remains most popular across the world, but apps are likely to
remain the preferred channel in most developed markets.
Mobile banking has not picked up sufficiently in either the U.S. or
Canada, due to security-related concerns. However, an analysis by
Deloitte shows that mobile banking could become the most-preferred
banking method by 2020. The study estimates that 20-25 million
Generation-Y consumers will become new banking customers by
2015.
It is believed that high smartphone penetration, higher income and
greater digital sophistication will drive increased demand for
mobile banking services. Since mobile banking is expected to be the
most cost efficient for banks, investment in technology to improve
and expand mobile banking services is likely to increase.
Security
With online transactions expected to boom over the next few years,
the topmost concern remains security. While banks will spend
significantly on secure payment systems, hackers are expected to
have a field day, largely targeting the flood of customers going
online. Last year saw a huge increase in security breaches,
something that may be expected to continue.
Recent research from McAfee revealed certain important facts:
first, that mobile malware was primarily spreading through apps;
second, 75% of infected apps came from Google Play; third, the
chances of downloading malware or suspicious URLs was 1 in 6;
fourth, 40% of malware families disrupt the system in more than one
way, which is an indication of the increasing sophistication of
hackers; and fifth, 23% of mobile spyware can result in data
loss.
What is even more alarming is that even “secure” payment platforms
like digital wallets using NFC technology can now be infected by
worms within close range of devices (“bump and infect”). An
infected device can give out personal information during the
payment process that can be used to steal from the wallet.
Mobile security offerings currently come from AirWatch, Apple,
Avast, Check Point, Cisco (CSCO),
IBM (IBM), Juniper (JNPR),
Kaspersky, McAfee, Microsoft (MSFT), MobileIron,
BlackBerry (BBRY), Symantec
(SYMC) and Trend Micro, among others.
Alternative payment systems will continue to gain popularity. While
some of these payment systems, such as PayPal, have been around for
a while, other systems, such as Google’s digital wallet, V.me and
the FIS Mobile Wallet are still in the making. Alternative payment
systems never really gained momentum in the past because of the low
volume of transactions. However, as online transactions continue to
increase, many more such systems could suddenly become
available.
We expect mobile security to become a major focus area for
technology companies, since this is the stumbling block to payments
through the mobile platform (currently just 2% of U.S. online
spending).
Digital Advertising
The U.S. digital advertising market has seen some very strong
growth in the past few years, such that the discussion has shifted
to its most effective channel, which is mobile. eMarketer estimates
that while the total digital ad market will grow 47.6% from 2013 to
2017, mobile will grow 271.0%, with desktop declining 17.5%.
Total growth rates are expected to continue declining: 12.6% in
2014, 10.3% in 2015, 9.2% in 2016 and 7.1% in 2017. Retail,
financial services, consumer packaged goods (CPG) and travel in
that order, are expected to drive this growth. The mobile platform
will remain particularly strong, growing 56.0% in 2014, 41.8% in
2015, 33.1% in 2016 and 26.0% in 2017. Spending on mobile ads is
expected to increase as a percentage of total spending on digital
as well as total media ads in each of the years.
The current strength in online advertising is coming primarily from
the growing popularity of the display format. Of all the forms of
online advertising, display (including video, banner ads, rich
media and sponsorships) is expected to see the strongest growth
over the next few years. The underlying drivers of growth of the
display format are the continued increase in the number of users,
greater propensity of users to consume online, a growing inventory
of advertisements that serve to lower advertisement prices and the
need to create brand awareness online.
Google’s YouTube leads in the video segment. The increasing
propensity to use programmatic buying techniques (automating the
inventory buying process) is hurting both Google’s and
Yahoo’s (YHOO) premium placements. Yahoo is
currently focusing on the content side of things in order to boost
ad revenue. Facebook (FB) on the other hand has
more relevant personal data, which advertisers like. It is also
very strong on the mobile platform, which has been driving its
results in recent times.
While digital advertising spend has been moving to non-search
portals, such as Facebook, search is likely to remain relevant and
important. Google is the leader here and is using its other
technologies (maps, voice, devices) to make its services more
invaluable to users. Its Enhanced Campaigns strategy that seeks to
integrate ad campaigns across platforms is also bearing fruit, as
it is proving more profitable for advertisers.
Search advertising results are measurable, and therefore more
predictable, than other media. This also makes the market more
resilient in recessionary conditions, since advertisers are more
confident about the results of their spending.
Since ecommerce entails the buying and selling of goods or services
over electronic systems, it includes companies that are totally
dependent on these sales, those that are gradually moving to it, as
well as those that want to use it partially. Therefore, the biggest
sellers or the ones growing the strongest are not necessarily those
that are solely dependent on the Internet.
The following diagrams seek to explain the position of companies
primarily dependent on the Internet for the distribution of their
goods and services in the context of the Zacks Industry Rank. Two
(Retail/Wholesale and Computer & Technology) of the 16 broad
Zacks sectors are related to the ecommerce industry as depicted
below.
We rank the 264 industries across the 16 Zacks sectors based on the
earnings outlook and fundamental strength of the constituent
companies in each industry. To learn more visit: About Zacks
Industry Rank.
The outlook for industries positioned at #88 or lower is
'Positive,' between #89 and #176 is 'Neutral' and #177 and higher
is 'Negative.'
Therefore, Internet Services – Delivery and Internet Commerce being
in the 212th and 233rd positions, respectively are in negative
territory, with Internet Services (102nd position) being
neutral.
So it is not surprising that the average rank of stocks in the
Internet Services – Delivery industry is 3.29, for Internet
Commerce, it is 3.37, while for Internet Services it is 3.00.
[Note: Zacks Rank #1 denotes Strong Buy, #2 is Buy, #3 means Hold,
#4 Sell and #5 Strong Sell].
Earnings Trends
The broader Retail/Wholesale sector, of which Internet Commerce is
a part, should have a moderate quarter. With roughly half the
companies having reported thus far, the earnings beat ratio is
56.5% although the revenue beat ratio is much lower at 30.1%.
Total earnings for the sector have increased 0.3% in the fourth
quarter on revenue growth of 3.9%. This contrasts with an earnings
growth of 10.3% based on revenue growth of 3.8% in the preceding
quarter. This seems to indicate heavy discounts typical of the
holiday season.
The other companies we are discussing in the e-commerce outlook
(Part 2) fall under the broader Technology sector. Here we see a
fairly strong earnings beat ratio of 86.7%, supported by a revenue
beat ratio of 73.3%.
Total earnings in the sector were up 5.3% year over year similar to
the 5.6% increase in the third quarter. Total revenues increased
5.2% from last year, up from 3.2% in the third quarter. The trend
appears positive.
Earnings estimates for 2013 and 2014 indicate better growth
prospects in both years for Retail/Wholesale and Technology.
OPPORTUNITIES
The sector is under pressure right now, so we see very few
opportunities. Most of the companies are dealing with significant
investments or other growth-related issues, so it is hard get
enthusiastic.
The only stock that is worth recommending in this environment is
Facebook. The company has seen its ad revenues swell, despite fears
of reducing teen engagement and poorer-than-expected conversion for
advertisers. Importantly, the company continues to innovate,
frequently enhancing and/or making relevant changes to its
platform. Therefore, one can’t ignore the strong growth numbers and
resultant surge in estimates.
WEAKNESSES
On the other hand, we don’t see many significant weaknesses
either.
For instance, Chinese travel company Ctrip (CTRP)
is seeing tremendous growth fueled by a growing middle class and
increased consumerism in China, the shift from traditional to
online media for booking travel and increased mobile usage. The
company also reported solid results and provided strong revenue
guidance. However, we are unable to recommend the shares because it
is currently in investment mode to build position in the
super-competitive Chinese market and has also bought ToursForFun a
U.S. OTA to tap growth in the region.
Similar is the case with Baidu (BIDU), the
dominant search engine company of China. Baidu is the Google of
China with tremendous opportunities. The company has been investing
in the business to build a position in the mobile and video
segments and the company is already seeing growing monetization on
mobile. While integration of recent acquisitions and investment
considerations could be a slight headwind in the next few quarters,
the company is clearly moving in the right direction.
APPLE INC (AAPL): Free Stock Analysis Report
AMAZON.COM INC (AMZN): Free Stock Analysis Report
BLACKBERRY LTD (BBRY): Free Stock Analysis Report
CISCO SYSTEMS (CSCO): Free Stock Analysis Report
CTRIP.COM INTL (CTRP): Free Stock Analysis Report
DISCOVER FIN SV (DFS): Free Stock Analysis Report
EBAY INC (EBAY): Free Stock Analysis Report
EXPEDIA INC (EXPE): Free Stock Analysis Report
FACEBOOK INC-A (FB): Free Stock Analysis Report
FIDELITY NAT IN (FIS): Free Stock Analysis Report
GOOGLE INC-CL A (GOOG): Free Stock Analysis Report
HOME DEPOT (HD): Free Stock Analysis Report
INTL BUS MACH (IBM): Free Stock Analysis Report
JUNIPER NETWRKS (JNPR): Free Stock Analysis Report
MAKEMYTRIP LTD (MMYT): Free Stock Analysis Report
MICROSOFT CORP (MSFT): Free Stock Analysis Report
ORBITZ WORLDWID (OWW): Free Stock Analysis Report
PRICELINE.COM (PCLN): Free Stock Analysis Report
QUNAR CAYMN LTD (QUNR): Free Stock Analysis Report
SYMANTEC CORP (SYMC): Free Stock Analysis Report
TRIPADVISOR INC (TRIP): Free Stock Analysis Report
VISA INC-A (V): Free Stock Analysis Report
YAHOO! INC (YHOO): Free Stock Analysis Report
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