Goldman Sachs is out with 10 themes to watch in the internet and interactive entertainment spaces for the coming year — and it’s no surprise that some of the themes find their biggest exposure in some of the industry’s biggest players, including Alphabet (GOOG) (GOOGL), Metaplatforms (NASDAQ:HALF) and Amazon.com (NASDAQ:AMZ extension).
Eric Sheridan and the firm’s team first highlight a couple of debates among key investors: what to expect as the “new normal” for post-COVID growth, and the extent to which management has held back investment to provide greater focus to actual head profits.
“We argue that investors will have to accept lower levels of normalized growth given pandemic-era penetration gains as digitization has accelerated, but that robust (well above global [gross domestic product] growth) remains for years to come for many key categories,” analysts say.
As for profits, many companies’ mid-quarter announcements are a “promising first step,” but in a number of cases it’s just a matter of reducing investments made over the past 6 to 18 months rather than incremental changes, they say. . All businesses, meanwhile, face the short-term hurdles of poor visibility into interest rate stability and consumer/business final demand stability.
Delving into more specific topics, Goldman Sachs notes that it continues to see “blurred lines” between traditional advertising and e-commerce, including “the rise in social commerce adoption (by digital advertising platforms) and retail media networks (by e-commerce and other marketplace platforms).” Best placed to capitalize on are Google (GOOG) (GOOGL), Metaplatforms (HALF) and Pinterest (PINS), says the group, while recently Amazon.com (AMZ extension) implemented new social commerce via its Inspire short-form video/photo feed for product discovery.
Speaking of short-form video, it’s also a key theme as rivals rotate to compete with the rapid success of TikTok (BDNCE extension). Despite a significant increase in elapsed time, monetization is still in the “early stages”. The most exposed to this issue are Google and Meta, says Goldman.
Google and Meta, along with Pinterest (PINS) and Snap (HURRY), are also central to Goldman’s fifth theme: the rise of the creator economy. Tools, monetization, and the role of “influencer” are meeting “a new industry dynamic where platforms embracing this shift are buying time, but increasingly need to share/split the unit economy of that traffic monetization with the content creator”.
Turning to the rise of local e-commerce, analysts note that the COVID-19 era has made activities like food delivery, in-store shipping, and online shopping/pick up in store “more normative” consumer behaviors “. Companies’ investments in the space are likely to take shape around a few key verticals — food delivery, convenience, groceries — that have the potential to spill over into wider consumption, and key players are DoorDash (DASH), Lift (LIFT extension) and Uber (New York Stock Exchange:SUPER) together with Amazon.
After a continued post-COVID rebound, online travel is evolving in two key ways, the team notes: Capturing more of the consumer wallet per trip and marketing leverage are likely to be key drivers of share growth. faster growth and operating margin leverage, with margin volatility a key industry debate for 2023. Most exposed to this theme, Goldman says, are Airbnb (ABNB), booking holdings (BKNG extension), Expedia (ESP) and Vacasa (VCS extension).
The cloud computing conversation is shifting from cost/efficiency to “an essential element in driving customer growth,” analysts say, though long-term growth is still an age-old theme – and the key names on display are Google (GOOG) (GOOGL) and Amazon Web Services (AMZ extension).
It was difficult in the 2022 discussions of internet stocks to stray too far from the concept of the “metaverse,” the evolved online space that blends virtual reality with other technologies for an immersive experience. “Within our universe of coverage, we look at game companies (Roblox (RBL extension), Activision Blizzard (ATVI), electronic arts (IT’S AT), Take two (TWO), Ubisoft (OTCPK:UBSFY)) and some digital advertising companies (Meta and Snap) as being at the forefront of this issue, both from the point of view of consumption and investment.”
A final theme for the space is increasing governmental and regulatory focus on business practices for players of scale, including Amazon, Google, Meta, DoorDash, Lyft, and Uber.
“We see three potential dynamics,” Goldman analysts say. “(1) ‘headline noise’ as investigations, fines and new rules proliferate; (2) rising costs to comply with a number of global initiatives (particularly in the area of data collection and user privacy consumers); and (3) headwinds to any consolidation within the market or strategic mergers and acquisitions by large players (causing the industry to rely on internal product research and development).”
Summing up, analysts believe the most compelling risk-reward ratio in the group settles on a few large-cap stocks that have similar narratives: “well-established and downsized end-market positioning, ability to manage improved margin trajectory in 2023 and beyond (regardless of the macro backdrop in H1 2023), and a “wall of worries” that has become more pronounced over the past six months”: Uber (SUPER), Amazon.com (AMZ extension) and Meta Platforms (HALF).