The Internet sector posted a strong second quarter, with an increase in average revenue of 22% year on year and 9% sequentially. Average net income was also strong, with five out of the seven companies under coverage reporting positive net income. In terms of profit growth, Amazon led the way with a year-over-year increase of 831%, followed by eBay which reported a growth of 424%. Netflix and Google also reported positive year-on-year net income growth of 55% and 24%, respectively.
Advertising continues as a major revenue stream for many of these companies. While total Internet advertising revenue will surge at an 11.1% CAGR to reach US$260.4bn by 2020, it is not expected to reach its full potential as consumers still turn to ad-blocking to overcome delays in programs and loading times. Programmatic advertising has grown rapidly, with more than half of digital ads in mature markets now traded automatically—opening the way to better targeting of premium ads. While mobile is expected to grow at a CAGR of 19.6% to US$84.8bn in 2020, reflecting the ongoing growth in both smartphone usage and access to Internet through smartphones, mobile’s share of total global Internet advertising is expected to remain even at 32.6% in 2020. Until the measurement and user experience of mobile ads improve, advertisers will stick with traditional media and other forms of Internet advertising, notably search.1
E-commerce is one of the leading pillars of the Internet industry and is expected to see continued growth over the next three years. The ranking of the top five Internet retailers globally includes two companies based in the US, two from China and one from Europe. Pure online retail sales figures show the dominance of Amazon.com with an 8% share of the global market. Product revenues of the US-based company in 2015, at nearly US$80 billion, were three times higher than those of the second ranking online retailer, China's JD.com. Online marketplaces, represented by global companies such as Rakuten, eBay, and Alibaba, were also attracting online shoppers. Online consumers are seen to be more likely to purchase from a marketplace than a retailer website. Local and regional players also are expanding in many areas to challenge the global leaders. For example, Souq.com, a regional leader in the Middle East and India’s Flipkart and Snapdeal, are all rivals to Amazon.2
US retail e-commerce sales for the second quarter of 2016, were US$97.3 billion, an increase of 4.5% from the first quarter of 2016. Total retail sales for the second quarter of 2016 were estimated at US$1,201.9 billion, an increase of 1.5% from the first quarter of 2016. The second quarter 2016 e-commerce estimate increased 15.8% from the second quarter of 2015, while total retail sales increased 2.3%. This indicates the trend of online retail growing faster than offline retail. E-commerce sales in the second quarter of 2016 accounted for 8.1% of total sales.3
In company news, Amazon reported an increase in sales of 31% year over year, and EPS came in at US$1.78. The growth in EPS was due to improved performance and productivity across Amazon's business lines in contrast to the share buybacks that had been the case in prior quarters. Recent investments are starting to pay off in the form of higher margins as the firm continues to leverage greater volumes across its fixed cost base. The operating margin was 4.2%, compared to 2% last year, driven by a 200 basis point increase in gross margin. Amazon's recent investments in fulfillment infrastructure, technology and content, as well as Amazon Web Services (AWS) are paying off, and have allowed the company to take part in multiple categories and expand margins through positive operating leverage. AWS was the main driver of growth. Revenue increased 58% as Amazon was able to increase its share of the public cloud by lowering prices, and, due to greater scale and cost structure, its productivity. With its higher margin, AWS's growing portion of the total sales mix was a key factor behind the improved profitability.4
Verizon Communications Inc. has agreed to pay US$4.8 billion to acquire Yahoo Inc., ending a drawn-out auction process for the Internet company. The price tag, which includes Yahoo’s core Internet business and some real estate, is a remarkable fall for the Silicon Valley web pioneer that once had a market capitalization of more than US$125 billion at the height of the dot-com boom. For Verizon, the deal simply adds another piece to the digital media and advertising business it is building.5
Netflix’ Q2 2016 revenues increased by US$460.5 million over Q2 2015 due to growth in global streaming paying memberships, primarily internationally, reflecting Netflix’s focus on becoming a global Internet TV network. The average monthly revenue per paying streaming membership increased as a result of increases related to price changes and plan mix. The decrease in operating income in Q2 2016 compared to last year was due to increased content expense as Netflix continues to acquire, license and produce content, including more Netflix originals, and to increased headcount costs to support international expansion.
Microsoft Corp. and LinkedIn Corporation have entered into a definitive agreement under which Microsoft will acquire LinkedIn for US$196 per share in an all-cash transaction valued at US$26.2 billion, inclusive of LinkedIn’s net cash. Jeff Weiner will remain CEO of LinkedIn, reporting to Satya Nadella, CEO of Microsoft. The transaction is expected to close by the end of this calendar year. Over the past year, the company launched a new version of its mobile app that has led to increased member engagement; enhanced the LinkedIn newsfeed to deliver better business insights; acquired an online learning platform called Lynda.com; and rolled out a new version of its Recruiter product to its enterprise customers. Microsoft expects the acquisition to have minimal dilution of ~1% to non-GAAP earnings per share for the remainder of fiscal year 2017 post-closing and for fiscal year 2018 based on the expected close date, and become accretive to Microsoft’s non-GAAP earnings per share in Microsoft’s fiscal year 2019.6