Internet Stock ETPs: A Case for Investment

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“Internet companies” – once exotic and cutting edge choices for investors – are pretty par for the course these days.

But “internet companies” function in a wide variety of business areas nowadays and it can often be misleading to consider them as being comparable. This article will take a look at the activities and present an outlook on three giants often described as “internet companies” and underlying some Leverage Shares ETPs – Alphabet (ticker: GOOG) from the U.S., Baidu (ticker: BIDU) from China and Sea Limited (ticker: SE) from Singapore.

 

“Internet Companies” Explained

The term “Internet company” originally applied to upstart firms that presented their services to the general public primarily via a website – a concept that directly challenged the brick-and-mortar model that was then the norm. Initially replacing the telephone directory – and going on to represent much, much more – was the simple search engine. In this regard, Google – the parent company of which is Alphabet – is an early innovator and long-standing market leader. While Google doesn’t share its search volume data, it has been estimated that the company processes approximately 63,000 search queries every second, which translates to 5.6 billion searches per day and approximately 2 trillion global searches per year. It is also estimated that the average person conducts around 3 or 4 searches each day. The company controls a little over 92% of the search engine market share worldwide – including an estimated 72% of the desktop market and 92% of the mobile market.

Source: StatCounter

 

Google’s nearest competitor is Bing with a paltry 2.5% market share, while Yahoo accounts for 1.5%. The market share among these rival companies has hovered around these percentages over the past several years.

Baidu – widely touted as China’s Google – is estimated to average around 1.2% of all searches worldwide. In China, however, Baidu rules the roost while Google is relegated to obscurity.

Source: StatCounter

 

While Google has been operating in China since 2006, the company faced numerous run-ins with the Chinese government over searches running afoul of censorship policies, leading the search engine to be available only in Hong Kong as of 2010 and the country banning Google search sites in all languages in the mainland. In 2010, Google had a market share of 29% in China. Now, with it being limited to Hong Kong alone, it averaged about 2.8% of the total Chinese market in the past 12 months.

But when considered across the entirety of Asia – which includes China – the results firmly indicate that Google rules the roost.

Source: StatCounter

 

This dominance – especially in light of the China revelation – could be attributable to two factors:

  1. Google currently holds an average 98.7% market share in India – which has a similar scale of population as China – with similar numbers estimated in many other parts of Asia over the past 12 months;

  2. Chinese users are reportedly stepping away from using search engines in favour of searching within one-stop apps that are more tailored to their queries.

“Search” is an important source of revenue for Google and Baidu since ads for various fee-paying companies will receive priority placement on top of search results based on the user’s query. In 2020, over 80% of Alphabet’s $183 billion in revenue – $147 billion – came from Google’s ads business. Similarly, 70% of Baidu’s $18.7 billion in revenue for 2020 – $13 billion – came from ads.

Like Google’s YouTube, Baidu has a video/streaming service – iQIYI – with content at both free and subscription models along with revenue generated for the company via online advertising. Unlike YouTube, however, iQIYI offers TV shows and movies, thus making it analogous to the likes of Netflix and Amazon Prime.

In terms of technology, the increasing component of AI in Baidu’s offerings is likely to help drive up pricing of its ads, since it promises to offer more intuitive ad serving. In the past, Google has consistently claimed competitive victory thanks to its detailed search results, in-depth analytics, and evolving service offerings. If AI helps the company’s business to evolve better, it’s very unlikely that Google would be far behind Baidu in this regard.

Like Alphabet and Baidu, Singapore-based Sea Limited is described – and officially describes itself – as an internet platform operating across Southeast Asia and Taiwan. However, the term “internet platform” doesn’t describe all of it. Sea Limited – simply put – is an influential conglomerate that owns a number of online businesses, the Lion City Sailors FC (a football club), Indonesian bank PT Bank Kesejahteraan Ekonomi (BKE), Hong Kong-based hedge fund Composite Capital Management and a host of other companies.

The main drivers of Sea’s revenues – however – are two of its online properties – Shopee and Garena.

Shopee is a shopping app operating across Singapore, Malaysia, Thailand, Taiwan, Indonesia, Vietnam, the Philippines, Brazil, Mexico, Chile, and Colombia under both consumer-to-consumer (C2C) and business-to-consumer (B2C) models. Meanwhile, Garena operates in a powerful and growing online space: gaming.

A massive metric of interest is that the number of gamers in the world is estimated at 3 billion with the Asia-Pacific region home to the largest contingent and the Middle East and Africa showing the highest Year-on-Year growth.

In 2021, it is forecasted that, despite contractions on spending due to the pandemic, the gaming market will be worth about $175 billion globally. It bears noting that the forecast for 2020 was $159.3 billion, which was 9% lower than actual revenue earned.

Once solely the domain of desktops and expensive consoles, it is now forecasted that 52% of gaming revenue will be from games on mobile phones. Mobile games typically operate on the “freemium” model: they’re free to play, albeit with game experience enhancement options behind a paywall.

In terms of growth, it was forecasted in 2020 that Southeast Asia and Europe will show the highest revenue growth for mobile gaming companies over the next three years. Despite the dip caused by the pandemic, this upward march can be expected to continue in 2021.

These forecasts are particularly encouraging to Garena, an online game developer and publisher of free games that’s particularly active in Southeast Asia. One of its games – Free Fire – was downloaded 500 million times on the Google Play Store by February 2020. Also, by no means was all of its success limited to Southeast Asia: in Q1 2021, Free Fire generated $100 million in turnover in the United States.

 

In Conclusion

“Internet companies” service a rich and diverse set of areas, thus making this categorization rather broad. However, the fact remains that their point of sale and service being firmly in the digital domain makes these companies paradigm shifters in the way business used to be conducted. A comparison of stock performance versus the benchmark S&P500 (SPX) reveals a few fascinating aspects about the companies being covered.

Google’s success in beating the benchmark validates – in a fashion – that “Search” could very well be the most resilient sector of the “internet company” space. Well-entrenched and practically an alternative word for search in itself, Google proves itself a champion among the “internet companies”. Baidu, however, has been suffering a steady decline for the reasons already listed as well as possibly the current geopolitical tensions between China and the rest of the world. Whether iQIYI turns out to be the company’s saving grace over the next few quarters or not remains to be seen.

Sea Limited is a fascinating company to watch. Annual revenues have consistently been in the red over the past few years since the company has been on an expensive multi-year acquisition spree to bolster and support its shopping and gaming properties. Nonetheless, investor confidence in the management’s vision for the company remains sky-high – bringing its stock performance nearly par with Alphabet by the end of Q2 2021. Whether the company continues to go from strength to strength, of course, remains to be seen.

Leverage Shares offers 3X ETPs on Alphabet (3GOO) and Baidu (3BID), 2X ETPs on Alphabet (2GOO) as well as Shorts (-1X) on Alphabet (SGOO) and Baidu (SBIU). The company also offers 1X Trackers for Sea Limited (SE1X), Alphabet (GOOG) and Baidu (BIDU).

Investors should also review Leverage Shares’ full list of short & leveraged ETPs as well as trackers to supplement their portfolios in other sectors and subscribe to the mailing list to stay abreast of new developments.

Your capital is at risk if you invest. You could lose all of your investment.

Education Series: Single-Stock ETPs

Authored by

Leverage Shares

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