Thirty years ago, Tim Berners-Lee changed the world forever. At CERN — the world’s largest physics lab — he came up with the vision for the World Wide Web, which he set out in a paper entitled “Information Management: A Proposal.”
While his innovation took some time to take hold, it would eventually lead to the Internet Revolution in the second half of the 1990s. From this would emerge iconic companies like eBay (NASDAQ:EBAY), Yahoo! and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG).
But of course, not everything was rosy. During the past few years, we’ve seen how the internet can lead to bullying, invasions of privacy and yes, even outside election influence.
Because of this, the UK is planning on passing landmark legalization to help curb some of these adverse effects. At the core of this is to impose a duty of care on internet companies to their users. In other words, there could be more liability and restrictions, which could hamper growth.
What’s happening in the UK will probably not be a one-off. The country’s efforts could serve as a model for many others.
So what does this all mean for internet stocks? Well, there is no need to panic. Laws take time to evolve. Besides, when it comes to investing, the new regulations may wind up actually helping larger internet companies. After all, they have the resources to deal with the requirements.
Next, enterprise internet companies should also be relatively unscathed. These companies are focused on internal purposes and generally have a strong focus on security and privacy.
So in light of all this, what are some of the interesting internet stocks to watch? Let’s take a look at seven:
True, Facebook (NASDAQ:FB) is the poster child of what’s wrong with the internet! But this is fine. It means that the company has little choice but to find ways to deal with the new world of the internet — and is likely to keep thriving as an internet stock.
For example, last year the company ramped up its headcount for its safety and security division, from 10,000 to 30,000. But another key has been Facebook’s major investments in AI. Keep in mind that the company runs about 300,000 machine learning models every month.
But all this is not much of a burden, as the company keeps generating substantial free cash flows. Note that they came to $15 billion in 2018. In all, there is $56 billion in Facebook bank.
Of course, GOOGL has more than enough resources to invest in its security and safety systems as well as to fend off litigation. In the latest quarter, free cash flows came to a hefty $5.9 billion. The total in the bank? About $109 billion.
Even with its enormous scale, GOOG is still growing at a strong pace. Last year revenues jumped by 23% to $136.8 billion.
A big advantage for the company is its wide assortment of digital properties. The search engine, YouTube, Gmail, Maps, Chrome, Android and Play all have over 1 billion users. As far as internet stocks go, GOOGL is one of the most diversified.
But GOOGL also continues to invest in next-generation technologies. For example, its Waymo self-driving car business is poised to disrupt the massive auto industry. Consider that — in Arizona — the division is already providing an automated tax service.
The past five years has seen a transformation of Microsoft (NASDAQ:MSFT), going from an on-premise provider of software to a cloud-based focus. The first part of this strategy has been the retooling of the existing franchises like Office. Note that the cloud version, Office 365, has more than 155 million active users.
Next, there has been the development of new products, such as Teams and OneDrive. Although, Azure is perhaps the most important. This is the core cloud hosting platform that is focused on taking on the leader in the market, Amazon.com’s (NASDAQ:AMZN) AWS system. While MSFT has much work to do, the company has certainly made considerable progress. Azure’s market share is 15% compared to AMZN’s 35%.
And finally, MSFT has leveraged its resources to engage in aggressive M&A. And so far, the deals have been spot-on. The LinkedIn acquisition means that this internet stock now controls the largest professional online network, which has roughly 610 million members.
Then there is the recent deal for GitHub, the leading sharing network for programmers. The platform has over 31 million developer accounts.
In terms of the cloud opportunity, it is still large enough to allow for long-term growth for MSFT. According to Gartner, spending is forecasted to go from $175.8 billion in 2018 to $278.3 billion by 2021.
Adobe (NASDAQ:ADBE), which was founded in 1982, has seen dynamic changes in the past few years. One of them has been the transition to the cloud, which has resulted in a powerful recurring revenue base. But ADBE has also ramped up its dealmaking, as the company has acquired companies like Magento and Marketo.
The result is that there is a diverse set of revenue streams, all of which are growing at a nice rate:
- Document Cloud: This category includes apps that help with document management.
- Creative Cloud: Of course, the is the main driver of the business, which includes a wide array of applications like PhotoShop.
- Experience Cloud: This is a platform that helps with analytics and marketing automation.
Granted, the latest quarter was a disappointment. But this should be nothing to worry about. For the most part, the company is in the process of digesting its acquisitions. However, when looking at the long haul, there should be more than enough room to grow. Keep in mind that the addressable market opportunity is in excess of $100 billion.
With the tax season in the final stretch, the folks at Intuit (NASDAQ:INTU) are definitely busy. The company’s TurboTax is seemingly invisible leader in the online tax prep business. And it is a significant contributor of ongoing high-margin revenues.
But of course, this is not the only franchise for INTU. The company also dominates the lucrative small business accounting market with its QuickBooks system. It has seen renewed growth as INTU has migrated to the cloud.
While all this is great, there is something else that these two businesses provide: rich data. In other words, this can be turned into other growth businesses. For example, INTU has recently entered the market for lending to small businesses and it has already shown much traction. About 60% of the customers that get approved for loans are considered “un-lendable” by traditional financial institutions yet the loss rates are less than half the industry standard.
Talend (NASDAQ:TLND) does not get much attention. But it should. The company is benefiting from the megatrend of data integration for cloud computing.
It’s a tough problem to solve but TLND’s technology has been tested for some time. Note that the roots go back to a highly successful open source project.
As for growth, it continues to be strong. In the latest quarter, revenues shot up by 38%. The customer based also went over 3,000.
It’s true that the data market may not be sexy — but it is strategic. And as seen with companies like Mongodb (NASDAQ:MDB) — which is another open source player — the returns for shareholders can be standout.
As an executive at Salesforce.com (NYSE:CRM) in the company’s early days, executive Tien Tzuo had first-hand experience on the difficulties of creating a home-grown subscription platform. So he wondered: Might there be an opportunity here for a startup?
Well, there was. Tzuo would go on to co-found Zuora (NYSE:ZUO), which is the leading player in the enterprise-level subscription market. During the latest quarter, customer usage came to $10.8 billion, up 56% on a year-over-year basis.
No doubt, this has translated into strong performance on the top line, with revenues up 40% for last year to $235.2 million. Some of the latest customers include Briggs & Stratton, Kia Motors, Ricoh and Bloomberg.
But ZUO is really still in the early phases of the opportunity. According to a report from Canaccord: “Zuora will sustain revenue growth above the Mendoza line for software companies, which nowadays is about 30% for the next 3-5 years.”
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.