eCommerce
Scale-based retailers with strong brands continue to be the best way to play the eCommerce space as they provide selection, convenience, and peace of mind when consumers transact online. USA eCommerce Y/Y spending appears to have accelerated in CQ1 (through 2/10) with +6% growth vs. +3% growth in CQ4, per comScore. Note that while the data under represent growth rates, it has directional significance.
Online Advertising
Overall ad spending growth appeared to have accelerated in CQ1 marking the strongest Y/Y growth in several quarters, owing to a stronger economy and easy comparisons. Checks suggest search-advertising pricing was strong, driven by better conversion rates as more consumers transacted. Display advertising also showed strength, driven by Y/Y pricing increases as advertisers, at the margin, shifted incremental spend toward online channels. Google's query + cost-per-click trends remained healthy.
Interactive Entertainment
Several hit titles launched in CQ1, but – according to NPD – USA software sales still fell 14% Y/Y QTD through 2/10. Y/Y growth returned in March owing to easy comparisons, but anticipate that software sales were down Y/Y in CQ1. Y/Y revenue growth rates may become increasingly strong as the year evolves owing to strong product releases such as Activision Blizzard's StarCraft II concurrent with battle.net, Microsoft's Natal plus Sony's Move motion sensor products, combined with easy comparisons.
Since many Internet companies reported CQ1 results in mid-April and provided CQ2E / C2010E, the US Dollar has strengthened +12% / +6% vs. EUR / GBP, owing to ongoing concerns about European sovereign debt. Current level of appreciation of USD against EUR / GBP could negatively affect (on an un-hedged pure impact basis) Amazon.com C2010E revenue / op. EPS by -2.6% / -2.4%; eBay (-3.5% / -6.9%), Google's (-3.0% / -4.3%); Vistaprint (-3.6% / -4.9%) and Yahoo! (-0.7% / -1.8%) vs. consensus based on June 1st FX rates. Analysis assumes no hedging and is intended to provide investors with a simple guide for potential currency impact in a rapidly changing environment. Since late April, the EUR is down 7% vs. the USD while shares of AMZN (-8%), EBAY (-10%), GOOG (-8%), VPRT (-9%), and YHOO (-7%) are down by similar amounts. Recent EUR weakness is largely reflected in share prices but further weakness (from current level of 1.22 USD / EUR) could cause additional share price declines. The challenge as stock pickers (not currency forecasters) is to remain upbeat on the fundamentals for most Internet leaders. US-centric Internet companies with least non-US exposure – include GSI Commerce (~5% of revenue), Blue Nile (12%), OpenTable (6%), Netflix (0%), WebMD (0%) and Shutterfly (0%).
Amazon
eCommerce leader that continues to take market share from offline and online channels. Accelerating mobile commerce business (estimate could reach 5-15% in next 5 years) and mobile commerce share could be higher than its eCommerce share. Faster-than-expected economic recovery could spur eCommerce growth. Growing inventory could force retailers to seek additional channels.
Ancestry.com
Remain buyers of ACOM shares as price target has been increased to $28 from $23 since current momentum is sustainable and the success and category awareness generated by Who Do You Think You Are could provide additional upside throughout C2010E.
Blue Nile Inc.
Following a solid CQ1, marked by strong international growth, prudent investments, and further proof of a secular rebound, NILE shares are becoming more compelling for long-term investors.
Dice Holdings Inc.
Attractive subscription-based business model and exposure to IT / Financials / Healthcare verticals – relatively low unemployment and high growth compared to overall economy. Recruitment recovery could boost shares.
Drugstore.com
drugstore.com continues to make progress toward profitability, but the stock is trading at a premium.
eBay
Expect near-term payments growth acceleration to continue as PayPal pushes key growth areas (crossborder transactions, Bill Me Later, mobile and virtual goods). Valuation is compelling - 7x current EV / C2010E EBITDA ratio vs. an 15x eCommerce average.
Google
Google shares represent a compelling value for investors with a 6-18 month investment time horizon. Improving ad environment, secular mix shift from offline to online advertising continues. It is well positioned in mobile search. Increased Android adoption could drive incremental ad revenue
GSI Commerce
GSI offers the only full-service eCommerce platform and is currently undergoing a sustainable free cash flow inflection. Acquisitions of RCI and MBS Insight will allow GSI to broaden its offering and diversify its revenue streams.
Netflix Inc
Optimistic Long-Term Despite Uncertainty around Competition and Digital Content Costs.
Overstock.com Inc
Current market value fully discounts continued revenue upside and recent momentum. While revenue outperformance is a positive sign, competition from scale-based eCommerce companies (Amazon.com + eBay) could challenge Overstock.com's business over the longer term.
Yahoo!
Advertising Shift to Online Provides Tailwind. Yahoo!'s user experience improving – just beginning to be reflected in better premium / non-premium mix. Minority stakes not appropriately valued + underappreciated. Integration of Microsoft transaction (CH2:10E) should add clarity, narrow strategic focus, improve margins.
Vistaprint N.V.
Although Vistaprint's core business / opportunities remain positive, but slowing growth of new customer editions, a strong US dollar, and concerns by some investors over rising marketing costs may limit near-term upside.
Shutterfly Inc
The company continues to provide best-in-class products while remaining ahead of the curve in leveraging social media to drive customer acquisition / brand building. Furthermore, Shutterfly has the ability to grow revenue and expand operating margin in a highly competitive consumer Internet category.
TechTarget, Inc.
Although valuable content and lead-generating business model position the company to benefit from potential improvements in IT spending and advertising markets, at current levels, attractive valuation exists elsewhere in the group
WebMD Health Corp.
WBMD is well positioned to benefit from the ongoing shift of offline to online ad spend in Pharma. Shares have rebounded ~90% from 52-week low.
