This is the second part of the eCommerce Stock Update. You
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
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 discuss
instead 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 second quarter (latest available
data) saw a deceleration in its growth rate. According to the BEA,
lower air passenger travel as well as reduced automotive rental and
leasing affected the industry during the quarter. As a result, the
industry grew 2.5% in the quarter, same as the real GDP growth of
2.5% (in the first quarter it grew 7.3% compared to GDP growth of
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 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].
According to the June 2013 TravelClick North American Hospitality
Review (NAHR), both occupancy and average daily rates (ADRs) in
North America are seeing steady growth this year. Occupancy rates
grew much more than ADRs most categories, indicating that demand is
coming at the cost of prices. Individual occupancy was higher than
group occupancy with individual leisure occupancy being stronger
than business occupancy. In the second quarter of 2013, total
travel occupancy grew 5.3% from last year with ADR growth at 3.5%.
Group travel is expected to be flattish in the September quarter,
although individual travel (both in terms of occupancy and ADRs) is
expected to accelerate.
Online travel agents (OTAs) are growing the fastest this year: up
11.7% in the second quarter, according to the TravelClick North
American Distribution Review (NADR). The hotels' own websites were
up 8.1%, with direct walk-ins and calls to the hotel growing 4.4%.
The global distribution system, used by travel agents and CRS
(calls to a hotel's toll-free number) were also up 5.7% and 3.7%,
respectively, reversing a negative trend.
Share of room nights based on actual reservations-
Smartphones are playing a key role in travel purchases, especially
for last minute purchases. eMarketer expects smartphone travel
researchers in the U.S. to grow to 50 million or 40% of all digital
travel researchers this year, with total U.S. mobile travel sales
touching $13.6 billion.
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 MMGY Global's 2013 Portrait of American Travelers
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
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
The latest to enter the fray is
) 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
) 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 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
) 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 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 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
Generation-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
consumers largely consists of checking account balances and
transferring funds, although they also like to pay bills on the
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
Mobile security offerings currently come from AirWatch, Apple,
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 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 more
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
14.9% in 2013, compared to the 15.0% growth in 2012.
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 slight upward revision is
attributed to previous estimates is driven by strength on the
mobile platform, which will grow 95.0% in 2013, 53.8% 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
) 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. Facebook's main problem is the decline in teen
usage and low conversion for advertisers.
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
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 Commerce and Internet Services - Delivery being
in the 32nd and 95th positions, respectively are in positive
territory, with Internet Services (166th position) being neutral.
So it is not surprising that the average rank of stocks in the
Internet Commerce industry is 2.65, for Internet Services -
Delivery, it is 2.94, while for Internet Services it is 3.06.
[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, is not expected to do too well in the third quarter,
considering the fact that both the estimated revenue and earnings
beat ratios are 38.9%. The calculated earnings beat ratio based on
companies that have reported thus far is just slightly higher at
Total earnings for the sector are estimated to increase 4.9% in the
third quarter on revenue growth of 3.8%, indicating escalating
costs and sluggish growth. This contrasts with an earnings growth
of 9.3% on a revenue base of 6.9% in the preceding quarter.
The other companies we are discussing in the e-commerce outlook
(part 2) fall under the broader Technology sector. Here we estimate
a fairly strong earnings beat ratio of 71.2%, partially supported
by a revenue beat ratio of 57.7%. While the estimated revenue beat
ratio is consistent with the 57.7% in the previous quarter, the
estimated earnings beat ratio is lower than the 75.0% calculated
for the second quarter. The earnings beat ratio of companies that
have reported thus far is 76.5%, better than the estimated numbers.
Total earnings in the sector were up 4.0% year over year compared
to a 9.6% decline in the second quarter. Total revenues did
slightly better, increasing 2.4% from last year, up from 0.6% in
the second quarter.
Earnings estimates for 2013 and 2014 indicate better growth
prospects in both years for Retail/Wholesale. Technology is
expected to be even stronger.
While many of the companies discussed are expected to do well this
year, there are a few stand-out opportunities.
The first is the emerging Chinese travel company
), which 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. These trends are spurring strong growth, which has resulted
in rising estimates.
The second is
), 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
Facebook is another opportunity worth looking into. 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 cant ignore the strong growth numbers and resultant
surge in estimates.
We do not see a lot of weakness, although many of the companies may
not be great opportunities either.
Revenue growth prospects for online travel companies Priceline,
Expedia and Orbitz Worldwide are good. International expansion is a
key factor driving growth for these companies and collaborative
agreements with local players will be the key. Lower-value
inventories in international markets are on the rise, so margins
could be impacted.
This is the second part of the eCommerce Stock Update. You
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