- The pandemic has highlighted the competitive edge that digital platforms can provide and online distribution seems to be a structural winner from the crisis.
- The shift to online distribution has received new impetus due to this crisis and we believe this trend is here to stay.
- Ride-sharing companies were deeply affected by the crisis, but a snapback is already becoming apparent.
- Regulatory risk for the internet sector, which used to be a main concern, is on the back burner for now.
The COVID-19 disruption has hammered home that necessity is the mother of invention. We asked Mark Mahaney, top-ranked internet analyst from RBC Capital Markets, LLC, what impact the COVID-19 crisis is having on the internet sector. Which technologies and categories could benefit? Which could lose out? And which trends will have staying power as the economy reopens?
Global Insight: As many people find themselves working from home, ordering groceries and other essentials, and binge-watching TV series, all online, it has occurred to them that they—and presumably others—are relying on the internet much more than before the crisis. Are all internet-related businesses benefiting from this surge in activity?
Mark Mahaney: You’re right, this has been a huge shock to systems, economies, and social patterns. Here are some of the things we’ve learned from the crisis.
First, almost no internet stock, even the most digital, is immune from the kind of social and economic dislocation that has been caused by the COVID-19 crisis. Of the 39 internet companies we cover, only a small handful have experienced material positive revisions to 2020 revenue estimates in the wake of the crisis. And slightly more than half of these companies have suffered 10 percent or greater negative revisions to 2020 revenue estimates.
Said another way, at the beginning of the year the median consensus revenue growth expectation for the internet sector was 21 percent, according to FactSet; it is now eight percent.
The categories that have been hit the hardest have been travel, ride-sharing, event ticketing, real estate, and advertising.
That said, a second key point is there are clearly a few categories of structural winners such as online retail and online food delivery.
Other segments that are really benefiting are those that offer cloud services and a digital presence. Small businesses, local services, or retail companies that find themselves without a digital presence are facing the prospect of no or much lower revenues for a number of months. This has created an impetus to make sure a web presence is part of their core strategy.
The third takeaway is that internet advertising has been negatively impacted—but not equally. Many companies have disclosed a material increase in usage on their platforms, but almost all also experienced a major deceleration in their ad revenue growth rates.
Predictably, the giants are proving to have the most resilient ad platforms. Why? Because they offer marketers the greatest reach and frequency in terms of audience—billions of daily users.
Because the ad marketplace is based on auction dynamics, prices can immediately correct and rebalance to meet and generate marketer demand. Also, no one would question a decision to buy ads on these huge industry-leading platforms, in our view. All these were reasonable assumptions going into the COVID-19 crisis, and they were all proved correct.
Fourth, online retail names have been positively impacted, for the most part equally. But at the same time, in a crude way, this pandemic has become an advertisement for the benefits and necessities of online retail.
Certain categories such as groceries, health care, home office supplies, distance learning, and home fitness have all experienced a spike in demand. There has been strength even among categories that would be considered highly discretionary such as fashion & apparel.
Our own Grocery Survey report supported this dramatically accelerated adoption. Yet we believe this adoption has been broad-based across all online retail verticals.
Fifth, the companies that have been negatively impacted have focused on cost management and liquidity in a way I’ve not seen in a while. More capital has been raised to shore up the balance sheet in the last month than we’ve seen in two or three years.
The world has changed in ways we never thought possible over the last three months. You have been researching companies for a long time and have seen other paradigm shifts with consumer spending, advertising, and travel following the 9/11 attacks and the Great Recession. How quickly can consumer spending rebound or consumers’ willingness to travel return?
We have definitely seen a shift in how consumers want to spend. I would expect that they will get back to normal spending patterns at the very end of this year or sometime in 2021.
I’m most struck by the way travel is likely to be the most delayed recovery category as well as by how much and how rapidly retail has shifted to online. The latter has been a two-decade phenomenon, but it’s clearly accelerating due to this crisis.
And it’s not just necessities, groceries, and personal care, but across the board: for example, home office supplies, home fitness equipment, and consumer discretionary categories such as fashion & apparel.
When people go back to work, they may cut back on their online shopping somewhat, but I think the overall trend is going to be there as we’ve had this accelerated adoption of the online retail channel.
To me, that’s going to be one of the biggest structural changes that comes out of this crisis.
So let’s focus on online grocery shopping. Certainly, it has taken off during the COVID-19 pandemic. Many more people are utilizing pickup at curbside as well as delivery. Do you think this will remain a part of life once the crisis passes?
I think so. We hosted a call with the president of Instacart, a private company in the online grocery space. The company has seen in weeks an acceleration in online grocery adoption that it thought would take years to occur. That company had to hire 300,000 individuals, more than doubling its employee base. Amazon has talked about building out its capacity by 60 percent in order to meet grocery demand.
Whether this surge in demand for online groceries is permanent or not, I don’t think that the acceleration in online grocery adoption will reverse. A lot of people needed to become comfortable with the idea of safely and effectively purchasing groceries from home.
My view is that most people have had a positive experience and will continue to do it once the crisis passes.
Ride-sharing companies have obviously changed our lives in many ways over the past few years. Will this concept be able to weather consumers worried about contagion?
There has been a dramatic reduction in ride-sharing usage during the pandemic, as sharp as in travel and live events, which have suffered a decline in demand of between 80 percent and 90 percent year over year.
If we can’t leave our homes it undercuts the basic value proposition of ride-sharing, which is inexpensive and effective mobility. My view is that demand comes back relatively quickly.
A few data points give us an indication. Uber, on its earnings call in early May, said that in states that have opened up such as Georgia and Texas, it has already seen a 40 percent to 50 percent increase in ride volume. That is off the bottom; rides are still down some 60 percent year over year—a dramatic reduction but you’ve seen a snapback.
For many, health risks associated with ride-sharing are preferable to those of public transportation. There will be extra costs for the ride-sharing companies to ensure that those cars are reasonably hygienic, but I think demand snaps back relatively quickly for ride-sharing.
There has been a lot of concern about increased regulation for big tech. Is that still an issue?
It’s certainly on the back burner for now, but it will probably come back as an issue, perhaps in a year or two, and over that period, the U.S. presidential election could also have a major impact on what happens to the regulatory risk.
Is there one trend that you believe our clients must keep their eyes on for the next year, or even for the long term?
We’ve had an acceleration in the adoption of all things digital. This unfortunate crisis has highlighted and elevated the importance of digital platforms, whether for consumers who need to provide for themselves at home, educate, and entertain, or for small businesses that need to reach customers, market and deliver to them, and provide for them while physical facilities are shut down.
This interview was edited and condensed prior to publishing.
Mark Mahaney is a managing director covering the internet sector at RBC Capital Markets, LLC. Mahaney has been ranked first in the Institutional Investor Poll for the internet sector (2008–2012). He has also been ranked first in the Greenwich Institutional Investor Poll for the internet sector, as well as the top earnings estimator and stock picker in the internet retail segment by the Financial Times and StarMine.
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