44% Of All e-commerce Transactions Estimated To Begin With A Product-focused Search Query According To UBS Investment Analysts; Google (GOOG) Remains The Top Overall Pick In The Sector
September 6, 2011 - The Wall Street Transcript has just published Retail Report offering a timely review of the sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Brian P. Fitzgerald is a Director and Research Analyst at UBS Investment Bank, where he covers the Internet and interactive entertainment. Previously, he was a Vice President and Research Analyst covering the Internet at Banc of America Securities LLC. Mr. Fitzgerald received an MBA from New York University's Leonard N. Stern School of Business and a B.S. in mathematical economics and computer science from West Point, The United States Military Academy.
Brian J. Pitz is an Executive Director and a Senior Research Analyst in equity research at UBS Investment Bank, where he covers Internet and interactive entertainment. Previously, he was a Principal and Senior Research Analyst covering the Internet at Banc of America Securities LLC. Mr. Pitz began his professional career as a Consultant in the business consulting practice of Arthur Andersen LLP in New York.
TWST: Given all the volatility and troubles we've seen recently, how have Amazon's numbers held up?
Mr. Pitz: Amazon continues to do well. They are accelerating revenue into every quarter. Last quarter, they put up 51% growth on the top line. That's up from 38% in Q1 and 36% in Q4. So despite the size of the business and a quarterly run rate at about $9.9 billion in revenue as of last quarter, this company is on track to do close to $49 billion in revenue in 2011. It continues to grow at an accelerating rate.
TWST: Please tell us about eBay. How do you feel about them?
Mr. Fitzgerald: We have had a "buy" rating on eBay for a while as they're going through a turnaround. Our viewpoint has been somewhat out of consensus as the bears argue the marketplace business isn't going to be able to grow more than a couple of percentage points - maybe flat or 1% to 2% on an annual basis. We disagree. Our thought is if e-commerce globally can grow 10% to 15%, we think eBay can grow the top line of the marketplace business by 5% to 10% at the very least. And with 5% to 10% top-line growth for the marketplace, we believe that this stock will definitely work.
We think they've sectioned off their business and they are selling harder-to-get items, items that are more limited in nature, similar to the private sales sites. And in places like the U.K. and other parts of Europe, we're actually seeing eBay outpace overall e-commerce growth as large brands and retailers join the site. And don't forget the eBay marketplace has a nice 40% margin profile. The other part of eBay's business is PayPal, which is a 20% margin business with a higher-growth top line and compelling long-term story. Now, we anticipate growth rates north of 20% for PayPal for the foreseeable future. And again as PayPal becomes a fair portion of the overall business, our sense is that overall margin inherently comes down a bit. I think the Street appreciates that. But all in all, a better-than-expected marketplace business will be a key driver for this stock.
TWST: The other stock you mentioned was Netflix. What's your broad-brush outlook on them?
Mr. Pitz: Broadly, we've got a longer-term call on this name. Our sense is, with the cost of content going up and the exclusivity of content going down, that's potentially a dangerous mix for Netflix, especially as other competitors with deep pockets like Google, Amazon, Microsoft (MSFT) and others also pursue video. In addition, it feels like they've probably boxed themselves into a corner a little bit with the latest price increase for the service. It seems like consumer reaction has been somewhat negative, and their anticipation is that churn rates will go up as they head into the third quarter.
I think the stock has adjusted for that, but we feel that if other companies continue to add more content to their free streaming platforms - at Amazon it's called Amazon Instant Video - our fear is that over time as there is more selection elsewhere, consumers' ability or willingness to pay $7.99 may decrease pretty substantially. If they do end up paying for content, then we think the model breaks down a bit. I don't think the Street has really factored in significant content costs, especially as the company launches overseas. If they spend a lot on content while subscribers churn off, I think that's a bad mix for the bottom line potentially.
TWST: Where are you pointing investors now? What are your favorite stories?
Mr. Fitzgerald: Google remains our top pick overall, and obviously, retailing impacts them. We estimate 44% of all e-commerce transactions begin with a product-focused search query, with Google earning revenue as searchers click on paid ads. The company's move into more product search-related categories is very e-commerce-centric. And if you can't find what you're looking for on Amazon, you are generally going to look to Google and search for it there and vice versa.
I think those are the two big channels in terms of searching for products. Again, eBay we like as more of the fringe e-commerce player, the harder-to-get, out-of-season items, almost like your replacement for offline stores like TJ Maxx (TJX). It essentially becomes almost like a factory outlet store for goods that were new, but for sale maybe three, six or eight months ago. We think there is a niche for that, and we think eBay does a pretty good job. And then finally, I think there are some other, interesting smaller-cap companies that are out there, some of the private sales sites or coupon companies that are definitely game changers, but we don't officially cover them, so it's harder to have a specific opinion on them.
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