Goldman Sachs names players exposed to its 2023 themes in Internet/gaming
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Goldman Sachs is out with 10 themes to watch in the Internet and Interactive Entertainment spaces for the coming year - and unsurprisingly, a number of the themes find their heaviest exposure in some of the industry's bigger players, including Alphabet (GOOG) (GOOGL), Meta Platforms (NASDAQ:META) and Amazon.com (NASDAQ:AMZN).
The firm's Eric Sheridan and team highlight a couple of top investor debates first and foremost: what to expect as a "new normal" for post-COVID growth, and the extent to which management has been reining in investments to provide a sharper focus on actual headline profits.
"We argue that investors will need to accept lower levels of normalized growth given the penetration gains of the pandemic era as digitalization has been accelerated, but that solid (well above global [gross domestic product] growth) remains in the years ahead for many key categories," the analysts say.
As for profits, the mid-quarter announcements from many companies are a "promising first step," but in a number of cases those are just unwinding headcount investments made over the past 6-18 months rather than incremental changes, they say. All companies, meanwhile, face the short-term hurdles of poor visibility into the stability of interest rates and into stability of consumer/enterprise end demand.
Digging into more specific themes, Goldman Sachs notes that it continues to see "blurring lines" between traditional advertising and e-commerce - including "the rise of social commerce adoption (by digital ad platforms) and retail media networks (by eCommerce & other online marketplace platforms)." Best positioned to capitalize are Google (GOOG) (GOOGL), Meta Platforms (META) and Pinterest (PINS), the group says, while recently Amazon.com (AMZN) has rolled out new social commerce via its Inspire short-form video/photo feed for product discovery.
Speaking of short-form video, it's also a key theme as rivals pivot to compete with the rapid success of TikTok (BDNCE). Despite a big rise in time spent, monetization is still in the "early stages." Most exposed to that theme are Google and Meta, Goldman says.
Google and Meta, along with Pinterest (PINS) and Snap (SNAP), are also key to Goldman's fifth theme: the rise of the creator economy. Tools, monetization and the "influencer" role are meeting with "a new industry dynamic where platforms embracing this shift are gaining time spent but increasingly need to share/split the unit economics of that traffic monetization with the content creator."
Turning to the uptick in local e-commerce, the analysts note the COVID-19 era made such activities as food delivery, ship from store and buy online/pick up in store "more normative" consumer behaviors. Investments by companies in the space are likely to take shape around a few key verticals - food delivery, convenience, grocery - that have the potential to extend into broader consumption, and key players there are DoorDash (DASH), Lyft (LYFT) and Uber (NYSE:UBER) along with Amazon.
After an ongoing post-COVID rebound, online travel evolves in two key ways, the team notes: taking more of the consumer wallet per trip and marketing leverage will likely be the biggest drivers of increased share, faster growth and operating margin leverage, with margin volatility a key sector debate for 2023. Most exposed to that theme, Goldman says, are Airbnb (ABNB), Booking Holdings (BKNG), Expedia (EXPE) and Vacasa (VCSA).
The cloud computing conversation is shifting from cost/efficiency to being "an essential piece of driving growth for customers," the analysts say, though in the long term the rise is still a secular theme - and the key names exposed there are Google (GOOG) (GOOGL) and Amazon Web Services (AMZN).
It was hard in 2022 discussions about Internet stocks to get too far away from the concept of the "metaverse," the evolved online space that merges virtual reality with other technologies for an immersive experience. "Within our coverage universe, we view the gaming companies (Roblox (RBLX), Activision Blizzard (ATVI), Electronic Arts (EA), Take-Two (TTWO), Ubisoft (OTCPK:UBSFY)) and certain digital ad companies (Meta and Snap) as being at the forefront of this theme, both from a consumption and investment standpoint."
One final theme for the space involves the rise of governmental and regulatory focus on business practices for scale players, including Amazon, Google, Meta, DoorDash, Lyft and Uber.
"We see three potential dynamics," the Goldman analysts say. "(1) 'headline noise' if investigations, fines and new rules proliferate; (2) rising costs to comply with an array of global initiatives (particularly in the area of data collection and consumer privacy); and (3) headwinds to any in-market consolidation or strategic M&A by large players (causing the industry to lean back on internal product R&D)."
Summing up, the analysts see the most compelling risk/reward in the group settling on some large-cap names that have similar narratives: "well established & scaled end market positioning, ability to manage for improved margin trajectory in 2023 and beyond (irrespective of the macro backdrop in 1H 2023), & a âwall of worryâ that has become more pronounced in the past six months": Uber (UBER), Amazon.com (AMZN) and Meta Platforms (META).