The Internet-advertisement industry is one of the fastest growing markets in the technology sector. With earnings season in full swing, investors can get an update on which companies are making headway in this space.
The industry
The US advertisement industry is one of the fastest-growing entities in the entire stock market. This huge industry has been supported by the rise in handheld devices, which ensure that users are connected to the Internet at all times. As compared to PC consumers stuck with bulky devices, which are much more difficult to carry around, handheld users can go online at any time.
This single fact has significantly increased the amount of time that users spend online and is the primary reason behind the high expectations surrounding this industry. According to data collected by Reuters, the US Internet-advertisement market grew by 15% last year and currently stands at approximately $36.6 billion. More data from PWC reveals that the key to growth in this space is handheld devices with revenue from smartphones doubling last year.
Competition
The competition in the US-advertisement arena is getting pretty tough with Google Inc (NASDAQ:GOOG) and Facebook Inc (NASDAQ:FB) leading the way. Google currently holds the number-one position in the US advertisement industry with a market share of approximately 50%, followed by Facebook Inc (NASDAQ:FB). Google Inc (NASDAQ:GOOG) has reported total US advertisement revenue of approximately $17 billion.
The display-ads market is a different story, and is being led by Facebook Inc (NASDAQ:FB), which has total revenue of $2.6 billion. Google is quickly catching up with Facebook Inc (NASDAQ:FB) in the display segment, as well, and some analysts expect that Google Inc (NASDAQ:GOOG)’s market share will exceed that of Facebook by the end of 2014.
Yahoo! Inc. (NASDAQ:YHOO) is currently at the third position in the display segment and saw negative growth during the quarter. During the quarter, there was an 11% decline and ‘ads sold’ fell approximately 7% year-over-year.
One of the major reasons for this performance was the redesign of the Yahoo! Inc. (NASDAQ:YHOO) homepage and email, which meant that multiple engagement trends were redefined. The search revenue saw a slightly better quarter, with y-o-y growth of 6.5% (10% of the closure of Korean operations are excluded). There was a significant increase of 16% in paid clicks, but it was somewhat offset by a 7% decline in CPC.
Facebook Inc (NASDAQ:FB) is currently my top pick in the Internet advertisement industry due to its mobile-monetization strength. Although Google Inc (NASDAQ:GOOG) has the Android OS on its side, the company has still not fully monetized its potential. Yahoo! Inc. (NASDAQ:YHOO) will have to further improve its display segment growth if it wants to avoid revenue erosion by Facebook and Google Inc (NASDAQ:GOOG).
The quarter
Yahoo!’s 1Q 2013 results were the primary reason behind a 4% after-market drop in the company’s share price. The company beat analyst expectations by reporting earnings of $0.35 per share as compared to analyst expectations of $0.24 per share. Earnings were up 36% y/y but the market was focusing more on the revenue decline.
There was a 7% decline in revenue, which was $1 billion for the quarter. According to analysts, much of the net-income rise can be attributed to Alibaba and Yahoo! Japan, which contributed $217.6 million to the bottom-line performance.
Bottom line
The company reported an average quarter but considering the turmoil before Marissa Mayer, this can be counted as a win for Yahoo! investors. Yahoo! is currently trading at a forward p/e of 19 and has significant room for upside.
Considering the high growth expected from the US Internet industry, we can value the company with a p/e of 25, which gives us a target price of $30. Therefore Yahoo! Inc. (NASDAQ:YHOO) has an upside of 30% at current valuations making the stock a strong buy. Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:GOOG) are still the best bet in the Internet advertisement industry but for investors looking for a high-risk, high-return play, Yahoo! is the way to go.
The article Which Is the Best Internet Bet? originally appeared on Fool.com.
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