(Note: This is Part 2 of the eCommerce Industry Stock Outlook.
Read Part 1 here
Although retail e-commerce is the segment that most of us are
interested in, it is in fact just a small part of the overall
ecommerce market. In fact, retailers and service providers generate
just 4.4% and 2.3%, respectively of their revenues online, a
slightly higher percentage than they were in the prior year. The
U.S. Census Bureau categorizes these two segments as
According to the U.S. Census Bureau, the manufacturing sector is
the largest contributor to e-commerce sales (46.4% of their total
shipments), followed by merchant wholesalers (24.6% of their total
sales). These two segments make up the business-to-business
This places the business-to-business category at 90% of total
e-commerce sales, with the balance coming from the
business-to-consumer category. The latest numbers from the Bureau
suggest that the fastest-growing segments were manufacturing and
retail. [All the above data from the U.S. Census Bureau relate to
2010, as published in May 2012]
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 other segments of the e-commerce
market, including 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 6-8% a year from 2012 to 2016
leading to a 49% increase in the number of users during the period.
Visitors from the Middle East are expected to be the
slowest-growing (29%). South America, Asia and Oceania growth rates
are expected to be comparable at 83%, 82% and 82%, respectively.
The fastest growth is expected to come from China (232%), South
Korea (200%), Brazil (150%), Russian Federation (139%) and India
(94%). Travel and tourism is one of the country's strongest
industries, contributing a trade surplus in each of the last 20
According to research from eTrack, eMarketer and Alexa.com compiled
in September 2012, Internet-based travel booking revenue has grown
73% over the last five years, with 57% of all travel reservations
being made online. The bookings and revenue generated by source and
category (latest estimates) are represented in the following
The top travel booking sites are Booking.com, Expedia.com,
Hotels.com, Priceline.com, Kayak.com (recently 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
(EXPE), this narrows down the top companies in the segment to
) and Travelocity. However, there are several others worth
considering, such as
), which was spun off from Expedia.
According to a report by PricewaterhouseCoopers, the improving
economy will result in a 1.8% increase in demand for U.S. hotel
reservations this year, which along with a 0.8% increase in hotel
supply will lead to higher occupancy rates (62.0%). As a result,
RevPAR will be up 5.9%.
However, most players have extensive operations in Europe and a
growing presence in Asia, which means that they will be affected by
growth rates in these regions as well. PricewaterhouseCoopers
expects RevPAR growth to slow down in Europe, although some cities
will see growth while others (most notably London and Madrid) will
The global travel market grew 4% in 2012 and is expected to grow
another 2-3% this year. The Asia/Pacific region is expected to see
the strongest growth (up 6%), followed by Europe and South America
(mainly Brazil) at 2% each. North America (mainly U.S. is expected
to be flat this year [World Travel Monitor 2012].
Smartphones are playing a key role in travel purchases, especially
for last minute purchases. eMarketer expects smartphone travel
researchers to grow from 23.7% of total online travel researchers
in 2011 to 53.9% in 2016. Similarly, smartphone travel purchasers
are expected to grow from 12.6% in 2011 to 32.5% in 2016.
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.
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
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 maximum
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.
While QR code payments (as the technology is called) have already
been made by half the smartphone users in the U.S. (report compiled
by eMarketer), the usage was mainly out of curiosity. It appears
that the safety of the system comes at a price, which is the time
it takes to complete a transaction. This is the reason that Google
is still betting on its digital wallet.
Google's digital wallet allows a customer to make a payment by
waving his mobile phone over a POS terminal. Other than the
convenience of the whole thing, the main attraction being
highlighted is the security of the payment channel, since neither
the customer nor the retailer would be recording the personal
information related to the customer. Adoption of the device,
although it is some way off, will have a remarkable effect on the
volume and value of mobile transactions, since it should increase
the percentage of higher-value sales.
However, the cost of POS terminals is a downside to the system that
could easily turn away retail partners. This is an evolving area
and much could change over the next few years.
) 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
The greatest success however is currently being enjoyed by eBay's
Paypal, which has seen some success at traditional retailers such
The Home Depot
). One drawback that remains is that although the system is itself
secure, there is always a security risk for a buyer not used to
dealing with Paypal, since it requires personal information.
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 at the end of this year. Most banks already offer at least
one mobile banking offering, with some larger banks offering more
than one option. Messaging remains the most popular across the
world, but apps are likely to remain the preferred channel in most
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 gen
Y consumers will become new banking customers by 2015.
A banking.com study shows that 48% of "Generation Y" (gen Y)
consumers are already using online banking services. Moreover,
their preference for online banking is so high that around 30% said
they would consider switching financial institutions if they did
not provide the service. Both online and mobile banking by gen Y
largely consists of checking account balances and transferring
funds, although they also like to pay bills on the platform.
It is believed that high smartphone penetration, higher income
within this group 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
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
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,
), Avast, Check Point,
), Kaspersky, McAfee,
) and Trend Micro, among others.
Alternative payment systems will continue to gain popularity. While
some of these payment systems, such as eBay's 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
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
The U.S. digital advertising market has seen some very strong
growth in the past few years, despite the recession that impacted
the entire economy. eMarketer estimates that the market will grow
16.6% in 2012 to $37.3 billion, compared to the 21.7% growth in
2011 (latest available data).
However, growth rates are expected to drop over the next few years:
13.9% in 2013, 12.4% in 2014, 8.7% in 2015 and 6.4% in 2015.
Falling growth rates notwithstanding, the share of digital ad
spending in total ad spending is expected to increase from 20% in
2011 to 29% in 2016. By contrast, TV ad spending is expected to
drop slightly from around 38% of total ad spending in 2011 to less
than 37% in 2016. Print is expected to decline even more
significantly from 22.6% in 2011 to 16.4% in 2016.
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. Also, of all the forms of display
advertising, video and banner ads are expected to grow the
strongest from 2011 to 2016.
Search will remain supreme until 2016, gradually giving way to
video and banner ads, both of which will grow rapidly. The lower
pricing of video and banner ads has made them popular with brand
advertisers, so ad inventories are solid. Another factor favoring
display ads is the proliferation of smartphones, where the smaller
screens make display ads more effective than text ads.
Google will remain the most significant player in digital
advertising throughout the forecast period, growing its share from
40% in 2011 to 44% in 2014. Yahoo, Microsoft,
) and AOL will account for 7%, 7%, 7% and 2% share, respectively by
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
Search advertising is expected to remain popular, because 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.
As evident from the above table, the top picks in the sector are
online travel booking companies Priceline, Expedia and Orbitz
Worldwide. International expansion is a key factor driving growth
for these companies and collaborative agreements with local players
are helping. The ADR is something to watch here, as lower-value
inventories are on the rise.
We are also cautiously optimistic about Google despite its recent
history of misses, given the company's market position, business
stability, expected growth rates, strategic execution and positive
estimate revision trend. The current uncertainty is related to the
recently-acquired hardware business, which is impacting its
margins. But this is just a small part of the overall business and
we remain confident about management execution and planning that
have been commendable in the past.
While Facebook offers much higher growth, you also have to pay a
higher multiple for it. This doesn't make a lot of sense.
TripAdvisor is doing extremely well right now and the company's
decision to invest in offline advertising (TV) makes sense.
However, estimates have fallen as a result, pulling down the Zacks
Rank. Given the increased expenditure, growth will moderate in the
next few quarters. However, the stock remains a good pick for
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