If you’ve been lucky enough to own Internet stocks — mostly search stocks like Qihoo 360 Technology (QIHU), Yahoo (YHOO), Baidu (BIDU) or Google (GOOG) — of late, then congratulations … you’ve made good money.
Heck, it doesn’t even matter which one you owned, as they’ve all outpaced the market.
Still, veteran investors are understandably asking themselves just how much longer this unusual pocket of strength will hold up. Are the underlying companies truly doing this well, or are traders simply gravitating to Internet stocks because there’s nowhere else to invest, and they know the web’s not going away?
Let’s take a look.
Cause and Effect
While the S&P 500 may be up by an impressive 14% year-to-date, that gain’s been trounced by Google’s run-up of 25% for the year so far. Yahoo’s topped that with its 35% rally, but it’s Qihoo 360 that’s rocked them all with a 48% advance for 2013.
Baidu is a year-to-date laggard, in the red since the end of 2012. But even BIDU has gotten on its horse this month, rallying more than 15% in May so far (easily topping the S&P 500’s 5% advance for the month).
Traders haven’t exactly had to scramble for the reasons behind the big moves. Qihoo 360, for instance, met earnings estimates of 14 cents per share, while topping revenue estimates by more than $3 million. Better still was the company’s outlook for Q2. The pros were only looking for a top line of $121.5 million, but Qihoo suggested a figure around $144 million was more likely.
And it’s not just Qihoo 360 that’s lighting up the Asian internet market. Baidu has finally figured out not only that mobile is important, but also realized that video can be leveraged to foster tremendous growth. Indeed, through a series of actual and proposed acquisitions, Baidu is already China’s biggest online video site … and plans to grow that prowess moving ahead.
Internet video has become so big for Baidu, in fact, that an IPO of its iQiyi video site is in the works. The market’s responding favorably to the prospect.
As for Yahoo and Google, they’re doing just as well on the other side of the globe.
Yahoo’s questionable purchase of Tumblr notwithstanding, the company knocked it out of the park in the first quarter, topping earning estimates of 24 cents with a 38-cents-per-share profit … the fifth beat in a row, and the ninth in the past thirteen quarters.
And Google? Well, Google’s still doing what Google does, which is dominating the display ad market. Last quarter, in the U.S., Google actually put some distance between itself and ad revenue market share held by next-nearest competitors Facebook (FB) and Yahoo. Google now owns more than 24% of the display ad market, up from 21% a year earlier.
It’s not like these victories are the only thing going for these stocks either. All of these names, and many of their peers, are supported by a litany of recent good news. The stocks’ rallies are indeed deserved, even if their charts are overheated.
Of course, that still doesn’t answer the bigger questions: Why, and how long?
Will It Last?
Admittedly, it’s tough to assume the blatantly obvious and logical reason a stock is behaving in a certain way is the actual reason for a stock’s behavior. In this case, however, things are what they seem. No less, no more.
And the way things are now is simple: 1.) online advertising is growing, and 2,) mobile traffic is growing. There’s some overlap of the two, but both are also growing at least partially independently.
The International Data Corporation reported earlier this week that the U.S. online display advertising spend was up 6% in the first quarter. Search revenue was up 5%. Mobile advertising was up almost 80%. Though mobile advertising is still a small subset of the total spent on web-based advertising, it’s also the fastest growing segment of the market.
China’s online advertising revenue is growing at an even faster clip. Q1’s online ad sales were 39% better than the online ad revenue from Q1 of 2012, as more and more of the Chinese market gets and stays online.
Yet there’s still plenty of room to grow.
As of the end of last year, only 42% of the country’s residents had regular access to the world wide web. On the other hand, 75% of China’s populous owns a mobile phone, making it the most likely way many of the country’s residents connect to the rest of the world.
I know what you’re thinking: You mean the Internet and mobile market (here and abroad) simply isn’t yet saturated?
That’s absolutely correct, at least in terms of hours of usage if not in terms of a headcount. There’s a lot more growth to go here, as Americans as well as the Chinese become more and more glued to the web … no matter how they access it.
It’s not a high-brow explanation, but it’s still investment-worthy — much more so than other industries — and will be for a few more years.
That doesn’t make names like Baidu and Google bulletproof in the short run, but it does keep them at the head of the class for the foreseeable future.
As of this writing, James Brumley did not own a position in any of the aforementioned securities.