The Internet service industry is one of the fastest growing industries in the world. The rapid advancement in internet related infrastructure and services is the cause of this growth. The development of different internet applications has changed how businesses function. In addition, mobile Internet has skyrocketed Internet penetration. The penetration of mobile Internet services is estimated to increase from 23% in 2012 to 54% in 2017. In emerging economies, China is the largest Internet market in terms of users, and its services are expected to continue to increase due to expansion of internet coverage in remote and rural areas. What do three companies in this industry have to offer investors?
Expansion of online search services
Qihoo 360 Technology Co Ltd (NYSE:QIHU) wants to continue expanding its market share and is improving its 360 search browser. Previously, users had to type the whole URL in order to visit a particular website. Now, users can type keywords and results will be shown on Qihoo searches, which will save time and increase traffic. It is also making its search experience user-friendly by separating paid and unpaid listings. Through these measures, Qihoo expects to take its search market share to 20% in 2013 and generate $80.4 million in revenue for 2013.
Qihoo 360 Technology Co Ltd (NYSE:QIHU) mobile gaming represents 42% of the company’s total revenue and shows immense growth potential. It generated around $2 million of mobile games revenue in the first quarter. Due to increasing smart-phone penetration in China, mobile games will be a $1 billion market in 2013, and is expected to show triple digit growth in the coming 15 months.
Smartphone penetration will rise due to 3G service promotion and increasing availability of $100 phones from Chinese vendors. Qihoo 360 Technology Co Ltd (NYSE:QIHU) will continue to expand its share in mobile games, and it will use its mobile security product and PC-based products to cross-sell its gaming products. Therefore, Qihoo mobile game’s revenue will grow at a rapid pace, and it will become major source of total mobile revenue in the next two years. Qihoo 360 Technology Co Ltd (NYSE:QIHU) is expected to generate mobile games revenue of $35 million in 2013 and $152 million in 2015.
Acquisition of market leader to expand subscriber base
On May 8, Trulia Inc (NYSE:TRLA) announced that it will acquire Market Leader Inc (NASDAQ:LEDR) for $355 million in cash and stock deal. Market Leader is a SaaS based real estate technology company providing customer relationship management, or CRM, tools to real estate agents. Market Leader Inc (NASDAQ:LEDR) has a software customer base of 135,000 users, which is expected to rise to 160,000 users in 2016. This will give Trulia Inc (NYSE:TRLA) a chance to cross-sell its advertising products to a large customer base.
Trulia Inc (NYSE:TRLA) will also be able to leverage Market Leader Inc (NASDAQ:LEDR)’s strong relationship with its franchisers and brokers. Market Leader has three leading franchisees and has partnership with top brokers. These franchisees promote CRM tools, which enhance the agent’s productivity and promote partnership between the agent, brokers, and franchiser. The acquisition is scheduled to be complete in the third quarter of 2013 and is expected to generate incremental revenue of $15 million by 2016.
Market Leader Inc (NASDAQ:LEDR) is a real estate technology company and provides marketing tools to around 23,000 agents in the U.S. Since 2005, it has made six acquisitions in the real estate sector and established its expertise in the real estate industry. It has adopted a top-down strategy due to an increasing trend of agents looking to brokerage houses for technology solutions. Its primary focus has been providing software tools to help agents generate more leads.
Trulia Inc (NYSE:TRLA) acquiring it will provide potential synergies to Market Leader Inc (NASDAQ:LEDR) as well. It can now sell its software tools with the help of Trulia’s advertising to subscribers. The integration of both companies’ products will make them more competitive, and help to close more leads.
Unlike its competitor, Zillow, Trulia Inc (NYSE:TRLA) also offers a standalone mobile product, Trulia mobile ads, or TMA, which are priced 15%-20% more than its desktop offering, and Trulia local ads, or TLA. Trulia charges premium pricing because of higher conversion of mobile leads since it has an effective search functionality and a click-to-call function that enables greater agent interaction. Thus, Trulia stands to gain from the ongoing shift from desktop usage to mobile usage. Trulia has a paid subscriber base of around 27,920 users consisting of 2,000 mobile users, 21,300 desktop users and 4,600 users of both mobile and desktop. It expects the total desktop subscriber base to decrease to 20,438 users, while mobile subscribers will increase to 3,608 users in 2013. Due to a growing mobile subscriber base and premium pricing, Trulia’s average revenue per user, or ARPU, will rise from $128 per user in 2012 to $185 per user in 2013.
Conclusion
Internet penetration and growth of mobile Internet have helped these companies increase their bottom-lines. Qihoo is expanding in both search as well as mobile segments. Improvements in its web search service and growing smartphone usage will aid revenue growth. Trulia’s acquisition of Market Leader is a win-win situation for both companies. Trulia will use Market Leader’s technological expertise to expand its customer base and provide value service to subscribers. On the other hand, Market Leader can use Trulia’s advertising to sell its products. I recommend buying all three stocks.
Madhukar Dubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article 3 Internet Services Providers on a Spectacular Bull Run originally appeared on Fool.com and is written by Madhukar Dubey.
Madhukar is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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