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 5.2% and
3.1%, 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 most reliant on e-commerce sales (51.9% of their total
shipments), followed by merchant wholesalers (26.4% of their total
sales). These two segments make up the business-to-business
The latest numbers from the Bureau suggest that growth rates across
all segments were similar with services being just a bit slower.
[All the above data from the U.S. Census Bureau relate to 2012, as
published in May 2014.]
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.
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 first quarter of 2014 did not go
that well. According to the BEA, the industry declined 1.0% in the
quarter, better than the real GDP decline of 2.9% (in the fourth
quarter of 2013 it grew 4.5% compared to GDP growth of 2.6%). The
recreation and entertainment segment was the main driver of
weakness, declining 11.2% in the quarter (compared to a 0.9%
increase in the previous quarter).
Food services and drinking places also contributed with a 3.5%
decline (compared to a 7.4% increase in the previous quarter).
Accommodation prices went up 13.2% while passenger air
transportation prices dropped 5.5%. They were down 8.0% and 7.0%,
respectively in the previous quarter.
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
) and both Hotels.com and Hotwire.com part of
), this narrows down the top companies in the segment to Priceline,
) and Travelocity. However, there are several others worth
considering that include
), which was spun off from Expedia, and
), which recently had its IPO.
The top site for travel content is TripAdvisor, visited by 60% of
Americans when choosing a hotel.
) YouTube is now growing in popularity and is the second in line,
according to the MMGY Global's 2013 Portrait of American Travelers
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
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:
According to STR Global, occupancy rates, ADRs and RevPAR saw
positive growth across the world in May 2014:
A recent PhoCusWright report mentions the top seven technology
trends for the travel market. Accordingly, it appears that video is
essential to draw customers and content marketing, guides, travel
information and ROI tracking can all benefit from it. Trend two was
with respect to search engines.
The report says that Google's algorithms are now favoring site
design rather than keywords, making SEO somewhat redundant. So site
design and navigability are becoming essential to capture search
traffic. Social media has increased the availability of reviews, so
companies are increasing focus on the overall travel
Trend four is increasing mobile usage, which the report says
will account for 27% of online travel revenue by 2015. The
fourth trend is in wearables, with Virgin Mobile and a tourism
board in Florida already using Google Glass effectively for
customer interaction and advertising, respectively. Using big data
analytics and social media marketing are the sixth and seventh
major trends, respectively.
eMarketer is less optimistic about global digital travel sales
growth. According to the research firm, this is a more mature
segment, so growth rates are decelerating compared to retail
ecommerce where they are growing faster. As a result, it expects
travel's 34.1% share of U.S. ecommerce sales in 2013 to drop to
26.2% by 2018.
However, mobile travel sales are expected to increase share on
total mcommerce sales from 31.1% in 2014 to 32.8% in 2018. Overall,
desktop travel sales will see continued declines over the forecast
period with mobile travel sales decelerating but continuing to grow
at double-digit rates.
Further, 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
Trends show that younger people, many of whom have been using the
Internet from a very early age are likely to spend more online. For
example, consumers aged 25-33 (Gen Y) spent an average $563 million
online compared to consumers aged 34-47 (Gen X), who spent $535 on
average. [Forrester report May 2014]
Considering this trend, 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
) with its "Amazon Payments" 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
) 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
), 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
). 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 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
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. But the
company is now beginning to see nice growth rates.
) 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
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.
) 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.
) 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
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
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 it 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.
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.
McAfee's threat report for the fourth quarter of 2013 added 2.4
million new mobile malware samples. This is up 197% year over year.
Moreover, new suspect URLs grew 40% in 2013 with new ransomware
doubling from the fourth quarter of 2012. The report shows a
growing tendency of malware producers to send handset information
related to customer behavior and location details.
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,
), Kaspersky, McAfee,
) and Trend Micro, among others.
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.
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
) premium placements. Yahoo is currently focusing on the content
side of things in order to boost ad revenue.
) 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. It is also making a splash in the Internet of
Things, with wearables, auto, TV and home automation products. If
Android becomes ubiquitous, the opportunity to serve ads will be
that much greater.
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
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
Therefore, Internet Services - Delivery and Internet Commerce being
in the 176th and 218th positions, respectively are in negative
territory, with Internet Services (168th position) being neutral.
So it is not surprising that the average rank of stocks in the
Internet Services - Delivery industry is 3.12, for Internet
Commerce, it is 3.29, while for Internet Services it is 3.09.
[Note: Zacks Rank #1 denotes Strong Buy, #2 is Buy, #3 means Hold,
#4 Sell and #5 Strong Sell].
The broader Retail/Wholesale sector, of which Internet Commerce is
a part, should see improving growth rates.
Total earnings for the sector are expected to increase 3.9% in the
second quarter on revenue growth of 7.6%. This contrasts with an
earnings growth of 0.4% based on revenue growth of 3.8% in the
The other companies we are discussing in the e-commerce outlook
(Part 2) fall under the broader Technology sector. Here we see a
decline in earnings and slight improvement in revenue.
Specifically, earnings growth is expected to drop to 2.3% (from
4.4% in the previous quarter), while revenue growth is expected to
be 3.7% (up from 2.7% in the previous quarter).
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
In this environment, we continue to like Facebook because of its
growing share of digital ad revenue and swelling user base. A
recent report from Forrester indicates that Facebook remains
extremely popular with teens, particularly the age group of 12-17,
allaying fears that teens were abandoning the platform.
Importantly, the company continues to innovate, frequently
enhancing and/or making relevant changes to its platform and
introducing new products for advertisers.
The other company we are positive about is Priceline. The company
has a strong international presence and is currently attempting to
take share in the domestic market.
Priceline is attacking on all fronts: it has increased offline
advertising without cutting back on online advertising, and is
offering discounts and building inventory. It also picked up
restaurant reservations company OpenTable to get into that
vertical, while using the closer customer interaction to pull
customers onto its platform. Higher costs will impact near-term
earnings, but the company is likely to see market share gains,
which will be positive for longer-term growth.
Yahoo is one of the few companies with significant growth issues.
The company is tied up in a search agreement with Microsoft that is
essentially transferring its search market share. With volumes
looking unexciting and pricing under pressure from programmatic
buying, the core business is under some pressure. Additionally,
there is some uncertainty about the amount its Alibaba holdings
will yield, which is keeping the shares range bound. CEO Mayer's
initiatives are not contributing materially to results just yet.
Expedia doesn't have the growth issues that Yahoo does, but the
company is seeing growing competition from Priceline in North
America, a region it has always dominated. Priceline has taken a
very aggressive approach to build market share here and this is
forcing Expedia to step up marketing costs.
Chinese travel company Ctrip 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. 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
), 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
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