This is part two of our e-Commerce Industry Outlook. Click here to read part one.
Although retail e-Commerce is the segment that most of us are interested in, it is in fact just a part of the overall e-Commerce market. In fact, 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 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 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 e-Commerce 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 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 years.
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 - Analyst Report) and both Hotels.com and Hotwire.com part of Expedia (EXPE - Analyst Report), this narrows down the top companies in the segment to Priceline, Expedia, Orbitz Worldwide (OWW - Snapshot Report) and Travelocity. However, there are several others worth considering that include Ctrip International (CTRP - Snapshot Report), MakeMyTrip (MMYT) and TripAdvisor (TRIP - Snapshot Report), which was spun off from Expedia.
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 April 2013 TravelClick North American Hospitality Review (NAHR), both occupancy and average daily rates (ADRs) in North America are seeing steady growth this year, with individual bookings (both leisure and business) doing better than group bookings. In the second quarter of 2013, total travel occupancy growth was 3.6% from last year with ADR growth even better at 3.8%.
Online travel agents (OTAs) are growing the fastest this year – up 13.7% in the first quarter, according to the TravelClick North American Distribution Review (NADR). The hotels’ own websites were up 5.0%, with direct walk-ins and calls to the hotel growing 3.7%. The areas of weakness were the global distribution system used by travel agents and CRS (calls to a hotel's toll-free number).
Share of individual bookings-
Global corporate travel bookings were up 8.8% in April, according to Pegasus Solutions, which is the single largest processor of electronic hotel transactions. This is the highest volume growth through GDSs since August 2011.
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. 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.
With practically all market research indicating solid growth in e-Commerce sales over the next few years, online players are vying with each other to come out with convenient and secure payment solutions.
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.
QR code payments have already been made by most smartphone users in the U.S. and the technology is moving mainstream. However, 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 hanging on to 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.
Visa (V - Analyst Report) 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).
The greatest success however is currently being enjoyed by eBay’s Paypal, which has seen success at a large number of traditional retailers such as The Home Depot (HD - Analyst Report) and Office Depot (OD). 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 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" (Gen Y) consumers will become new banking customers by 2015.
A banking.com study shows that 48% of 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 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.
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.
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 (AAPL - Analyst Report), Avast, Check Point, Cisco (CSCO), IBM (IBM), Juniper (JNPR), Kaspersky, McAfee, Microsoft (MSFT - Analyst Report), MobileIron, RIM (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 eBay’s (EBAY) 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 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).
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 14.0% in 2013, compared to the 15.0% growth in 2012.
Growth rates are expected to continue declining: 12.4% in 2014, 10.2% in 2015, 9.0% in 2016 and 6.9% in 2017. Retail, financial services, consumer packaged goods (CPG) and travel in that order, are expected to drive this growth.
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.
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.
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.
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 Commerce being in the 114th position is in Neutral territory, with Internet Services (185th position) being negative and Internet Services – Delivery (58th position) being positive.
So it is not surprising that the average rank of stocks in the Internet Commerce industry is 3.00, for Internet Services it is 3.15, while for Internet Services – Delivery, it is 2.76. [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, appears to be turning the corner. While the revenue beat ratio is on the low side (34.1%), the earnings beat ratio is pretty robust at 61.4%.
Total earnings for the sector were up 5.7%, but not nearly as good as the 7.4% growth in the fourth quarter of 2012. Total revenues were up 1.5% from last year compared to a 4.9% increase in the fourth quarter.
The other companies we are discussing in the e-Commerce outlook (Part 2) fall under the broader Technology sector. Here too, we see a fairly strong earnings beat ratio of 63.1%, partially supported by a revenue beat ratio of 45.6%.
However, total earnings in the sector were down 4.4% compared to a 1.7% increase in the fourth quarter. Total revenues did slightly better, increasing 2.9% from last year, down from 5.3% in the fourth quarter.
Initial earnings estimates for 2013 and 2014 indicate double-digit growth in both years for Retail/Wholesale. Technology on the other hand is expected to be flat this year and up double-digits in the next.
While many of the companies discussed are expected to do well this year, there are a few stand-out opportunities.
TripAdvisor (TRIP - Snapshot Report) is doing extremely well right now and the company’s decision to invest in offline advertising (TV) makes sense. Traffic continues to surge, as the company continues to add content, both in the U.S. and important international markets.
Another good investment is Yahoo (YHOO), which is altering course under the leadership of Marissa Meyer. The company has been acquiring aggressively to position itself in the mobile segment and last reports indicated growing engagement.
Facebook (FB) is another opportunity worth looking into. The company is cozying up with Samsung, which has taken the mobile market by storm. It is also getting more innovative by the day, which is the only way to success here.
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.