Goldman Sachs has 10 themes to watch in the Internet and interactive entertainment spaces for the coming year — and surprisingly, a number of themes find their heaviest exposure in some of the industry’s biggest players, including Alphabet ( GOOG) (GOOGLE), Meta Platforms (NASDAQ: META) and Amazon.com (NASDAQ: AMZN).
Eric Sheridan and the firm’s team first highlight some key investor debates: what to expect as a “new normal” for growth after COVID-19 and the extent to which management has held back on investments to provide a sharper focus on the main profits.
“We argue that investors will have to accept lower levels of normalized growth given the pandemic-era penetration benefits as digitization has accelerated, but the solid (well over global [gross domestic product] growth) remains in the coming years for many key categories,” analysts say.
As for earnings, the mid-quarter announcements from many companies are a “promising first step”, but in a number of cases these are just headcount investments made over the past 6-18 months rather than changes in growth, they say. Meanwhile, all companies face the short-term headwinds of poor visibility into interest rate stability and consumer/business final demand stability.
Digging into more specific topics, Goldman Sachs notes that it continues to see “blurring lines” between traditional advertising and e-commerce — including “rising adoption of social commerce (from digital ad platforms) and media outlet networks retail (from eCommerce and other online market platforms).” Best positioned to capitalize are Google ( GOOG ) ( GOOGL ), Meta Platforms ( META ) and Pinterest ( PINS ), the group says, while Amazon.com ( AMZN ) recently launched new social commerce through video its short Inspire/ product reveal photo source.
Speaking of short-form video, it’s also a hot topic as rivals gear up to compete with TikTok’s ( BDNCE ) rapid success. Despite the huge increase in time spent, monetization is still in the “early stages”. Most exposed to this topic are Google and Meta, says Goldman.
Google and Meta, along with Pinterest ( PINS ) and Snap ( SNAP ), are also key to Goldman’s fifth theme: the rise of the creator economy. The tools, monetization and role of the “influencer” are meeting “a new industry dynamic where platforms that embrace this change are earning time spent, but increasingly must share/share the unit economics of that profit with traffic money with the content creator”.
Turning to the growth in local e-commerce, analysts note that the era of COVID-19 made activities such as food delivery, in-store delivery and online shopping/in-store pickup “more normative” consumer behavior. Investments by companies in the space are likely to take shape around a few key verticals — food delivery, convenience, food — that have the potential to extend into broader consumption, and the key players there are DoorDash ( DASH ), Lyft ( LYFT ) and Uber. (NYSE: UBER) along with Amazon.
After a sustained rebound post-COVID-19, online travel is evolving in two key ways, the team notes: taking more of the consumer’s wallet for travel and marketing leverage are likely to be the biggest drivers of percentage growth, growth faster and operating margin leverage, with margin volatility a key sector debate for 2023. Most exposed to this theme, Goldman says, are Airbnb ( ABNB ), Booking Holdings ( BKNG ), Expedia ( EXPE ) and Vacasa ( VCSA ).
The cloud computing conversation is shifting from cost/efficiency to being “an essential part of driving growth for customers,” analysts say, though in the long term growth is still a secular topic — and the top names exposed there are Google ( GOOG ) (GOOGL) and Amazon Web Services (AMZN).
It was hard in the 2022 discussions of Internet stocks to stray too far from the concept of the “metaverse,” the evolved space on the Internet that merges virtual reality with other technologies for an immersive experience. “Within our coverage universe, we look at gaming companies (Roblox (RBLX), Activision Blizzard (ATVI), Electronic Arts (EA), Take-Two (TTWO), Ubisoft (OTCPK:UBSFY)) and some digital advertising companies ( Meta and Snap) both at the top of this thread, from both a consumption and investment standpoint.”
A final theme for the space includes increasing government and regulatory focus on business practices for players at scale, including Amazon, Google, Meta, DoorDash, Lyft and Uber.
“We see three possible dynamics,” Goldman analysts say. “(1) ‘mainstream noise’ if investigations, fines, and new regulations multiply; (2) increasing costs to comply with a variety of global initiatives (particularly in the areas of data collection and consumer privacy); and (3) headwinds for any market consolidation or strategic M&A by large players (causing the industry to rely on in-house product R&D).
Summing up, analysts see the most compelling risk/reward in the group to be placed on several large-cap names that have similar stories: “well established and scaled market positioning, ability to manage improved margin trajectory in 2023 and beyond (regardless of the macro background in 1H 2023), and a “wall of concern” that has become more pronounced in the last six months”: Uber (UBER), Amazon.com (AMZN) and Meta Platforms (META) .