According to a study by Cisco, global mobile traffic grew by 70% in 2012 year over year. This traffic is expected to increase by 11.2 exabytes per month by 2017. The key factors for this growth will be feature enhancements in mobile devices and growth in the usage of smartphones and tablets. Though mobile devices contributed only around 4% to Internet traffic in 2012, with a constant increase in their usage they are expected to be a key factor for Internet traffic growth in the future.
In this article, I have picked three companies —Yahoo! Inc. (NASDAQ:YHOO), Youku Tudou Inc (ADR) (NYSE:YOKU), and Sohu.com Inc (NASDAQ:SOHU) — that have performed well in the past and expect long-term growth with the increase in mobile Internet usage. Using mobile as a growth platform, these companies are focusing to improve their profitability.
Accelerating mobile platform
Yahoo! Inc. (NASDAQ:YHOO) reported mixed earnings for the first quarter of 2013. Its first-quarter revenue was $1.07 billion, which included a decline in search and display advertisement revenue due to a lower price per advertisement rate. However, Yahoo!’s advertising revenue from mobile platforms improved and reached 300 million unique users this quarter against 167 million in the previous quarter. Mobile is going to be an important driver for the company’s long-term growth as its usage increases. Advertisers usually pay less for mobile display advertisements than other ad types, but Yahoo! reported a 16% increase in “paid clicks” this quarter as compared to the first quarter of 2012 thanks to improved content. By improving the mobile user experience and increasing content delivery, Yahoo! Inc. (NASDAQ:YHOO) has increased its focus on mobile display advertisements. It is estimated that the global mobile advertising market will reach $26.6 billion by 2016, and with accelerating mobile internet trends the company is targeting good advertisement revenue growth.
In the first quarter, Yahoo! Inc. (NASDAQ:YHOO)’s search advertisement revenue declined to $425 million, a loss of 10% year over year. To an extent, this decline in revenue was because of the closure of the company’s South Korean office. The search advertisement segment is one of the largest contributors to the company’s revenue, however, and shares 14% of the company’s total value. In a recent contract with Microsoft’s Bing, Yahoo! Inc. (NASDAQ:YHOO) has lowered its traffic acquisition costs by 3.7% in first-quarter 2013. This helped Yahoo! to report advertisement earnings growth of 6% quarter-over-quarter. It also saw a gain of 16% in paid clicks because of customized content. Providing customized content to its users, the company can further improve its search advertisement earnings.
Mobile – the next growth driver
With increasing demand for online video advertising and overall mobile user growth, Youku Tudou Inc (ADR) (NYSE:YOKU)reported first-quarter 2013 results with net revenue of $83 million, which was an increase of 21% from the first quarter of 2012. It posted net advertising revenue of $69 million, meeting the company’s estimation. The growth was mainly driven by increased use of its advertising services by branded advertising companies, along with improvements in the number of advertisers and increasing average spending per advertiser.
The demand for online video advertising is consistently growing. The price has increased by around 17% year over year for Youku’s and Tudou’s combined platform. Youku Tudou Inc (ADR) (NYSE:YOKU) has been providing advertising products to its clients at lucrative prices, which enables cross-platform advertising that is preferred by advertisers. Also, Internet companies are expected to spend 30% more in improving content in 2013 to provide high-quality content to their users. Youku sees a huge potential to improve its revenue by raising content costs and is planning to raise them by mid-2013, which will help it to realize gains in its net revenue in 2013.
With the increasing popularity of mobile devices and smartphones in China, its online video market in 2012 reported around 450 million users. Youku Tudou Inc (ADR) (NYSE:YOKU) reported around 100 million mobile video users per day by the end of 2012, a growth of 800% year over year, and has experienced more than 170 million video views per day. Also, the company expects its mobile video users to grow by 200 million and 300 million for 2013 and 2014, respectively. Youku Tudou Inc (ADR) (NYSE:YOKU) has generated revenue of $83 million in the first quarter and is planning to monetize mobile traffic growth by charging mobile video users.
Improving video traffic growth
In the first quarter of 2013, Sohu.com Inc (NASDAQ:SOHU) posted total revenue of $308 million, which exceeded consensus estimates by 5%. One of the major reasons of this growth was solid web gaming revenue of $167 million, which is up by 32% year-over-year.
Sohu.com Inc (NASDAQ:SOHU)’s gaming division, Changyou.com, recently announced its intention to acquire the remaining 28% stake in its web game subsidiary, 7 Road, for $78 million. With this deal, Changyou is looking to strengthen its position in the Chinese online gaming industry and expects to deliver high-quality web games to its users. This acquisition is seen as a growth opportunity for the company and will provide an advantage to Sohu’s non-game business as well. Changyou reported revenue of $177 million for the first quarter of 2013 and, with the 7 Road deal, Sohu is building up its online and mobile games platform which will bring accretion in its earnings in second-quarter 2013.
Along with web games earnings, video advertising sales reported double-digit growth that was quite above the company’s expectations. The key factor of this growth was high-quality video content. The company expects to see the same positive momentum in its revenue in the second half of 2013 as well. The company’s mobile video segment witnessed a 40% growth in mobile video viewers as well. Sohu.com Inc (NASDAQ:SOHU) has not started charging for mobile videos, but is planning to monetize its videos by charging active users from the third quarter of 2013, an action that will further enhance its revenue. Additionally, the company is coming up with a new data plan for its mobile video users that offers unlimited videos at a fixed monthly charge. With this plan, Sohu is estimating sales of $335 million in second-quarter 2013.
Bottom line
All three of these Internet companies are expecting to see better revenue in the coming year with the increasing number of smartphone users.
Yahoo!’s mobile platform, with its increasing advertisement revenue, seems to be growing strong and will be a key growth driver for its future profitability.
With increasing mobile video users, Youku plans to monetize mobile traffic growth for an increase in revenue in the long term.
The 7 Road deal will provide an opportunity to Sohu by adding the mobile game market to its non-game business, which will strengthen its position in the Chinese mobile game market.
I recommend buying all three of these stocks.
Shweta Dubey has no position in any stocks mentioned. The Motley Fool recommends Sohu.com.
The article 3 Internet Companies to Buy in 2013 originally appeared on Fool.com.
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