The Internet: Eight Predictions for 2008
In some ways, the old saying "the more things change, the more they stay the same" defined the Internet segment in 2007. Video and mobile remain the new frontiers in digital advertising, Google (GOOG; recent price, $680; S&P investment rank, hold) continued to take market share -- and please its shareholders -- and Jerry Yang was back at the helm of Yahoo (YHOO; $24; hold).
In 2007, we bid goodbye to George Reyes as the CFO of Google, Stratton Sclavos as the chairman and CEO of VeriSign (VRSN; $37; hold), and Terry Semel as the CEO of Yahoo. A number of major options backdating scandals were also largely resolved. And, Google received FTC approval to acquire DoubleClick.
First, let's review our seven 2007 predictions:
1. Comcast will further establish itself in the Internet portal market with material partnership developments.
Comcast (CMCSA; $18; sell) signed a major online advertising deal with Yahoo, acquired Internet movie-ticket company Fandango, and launched entertainment/video website Fancast.
2. Google will strengthen its relationship with Apple.
Google is one of the premier providers of applications for Apple's (AAPL; $195; buy) iPhone. We wonder how this partnership will progress, given Google's efforts around open networks and platforms. Also, we indicated we expected a new collaboration related to YouTube, whose content is now available on the iPhone and Apple TV.
3. Google's efforts beyond Internet search and contextual advertising will continue to deliver only mixed results.
Although YouTube has continued to gain market share in the online video segment, it's unclear what the financial impact to Google has been. We've been impressed by offerings from, and growth at, the company's iGoogle personalized portal offering. However, Google largely remains a "one trick pony," in our view.
4. Facebook's efforts to expand beyond students and recent graduates will be largely unsuccessful. Moreover, the company won't sell itself to a large Internet company, especially if its asking price is $8 billion or more, as an early investor and board member indicated it was worth, according to an unconfirmed report by Bloomberg.
Although we were correct that Facebook would remain private, we were wrong in predicting it would have difficulties growing. Facebook was arguably the biggest Internet story of 2007. And Microsoft (MSFT; $35; strong buy) bought a stake in Facebook that valued the company at $15 billion.
5. Although the November elections bolstered the chances for a new net neutrality law, we don't expect one to be enacted in 2007.
No net neutrality law was enacted, and folks now seem much more interested in the upcoming 700 megahertz wireless spectrum auction.
6. Despite Google's leading market share, Yahoo's Panama launch, and Microsoft's substantial search-related investments, Ask.com, part of IAC/InterActiveCorp, is the search engine to watch in 2007.
Google remained the search engine company to watch in 2007. Yahoo was a close second, due largely to its management changes and newly articulated priorities and strategy. Although IAC/InterActiveCorp's (IACI; $26; buy) Ask.com rolled out some great innovations, received notable accolades, and announced a multibillion dollar extension to its partnership with Google, its segment status didn't change much in 2007.
7. We expect transactional activity involving private Internet companies (primarily acquisitions of and minority stakes taken in them) to continue throughout the year.
Lots of private companies were acquired, including a firm we mentioned last year, LiveDeal (LVDL; $4; not ranked by S&P). A company we identified as one to watch in 2005, SideStep, announced its pending acquisition by online travel competitor Kayak in December.
Our predictions for 2008:
1. We do not expect the European Commission to simply "rubber stamp" Google's proposed purchase of DoubleClick. Despite the FTC's approval, we do not think the deal's consummation is a forgone conclusion. Remember General Electric (GE)-Honeywell (HON)?
2. Google will continue to make inroads in the mobile segment. But we don't expect the company to win spectrum at the upcoming 700 megahertz auction, become a wireless carrier, or introduce a Google phone, or Gphone, in 2008.
3. We project 39% growth in Google's 2008 gross revenues, but believe competition is going to contribute to further margin compression. We expect the pace of market share gains to decelerate and see some major partner losses.
4. We think Yahoo will have a better 2008 than 2007. Perhaps that's not going out on a limb after last year's drama, but despite the negative sentiment, the stock fell only 6% in 2007. We expect to see more thought leadership and innovation from the company in 2008. Most important, we think, Yahoo has already started to realign employees, and we would not be surprised if layoffs were announced and applauded by Wall Street.
5. eBay will continue to focus on, and do better relative to, the expectations of two core constituencies -- users and shareholders. We expect further improvements to the eBay (EBAY; $33; strong buy) website and "the customer experience." We also would not be surprised by more aggressive share buyback activity. The stock is one of our top picks for 2008 -- its P/E was recently less than 20 times our 2008 earnings forecast -- and we think it's a compelling value.
6. We expect VeriSign to exit the content delivery network (CDN) business, and sell its peer-to-peer-focused operations to a strategic buyer looking to diversify its offerings and gain market share. We think a large telecommunications firm is a possible acquirer. Regardless of who the buyer is, we believe this will increase competition in the CDN segment, further pressuring market leader Akamai Technologies (AKAM; $34; sell).
7. Despite continuing problems in the housing market, we think online real-estate company Move will outperform the S&P 500 this year. We expect real-estate advertisers to spend more of their advertising/marketing budgets online, and expect Move (MOVE; $2; buy) to benefit. We like the recent additions to the management team, new priorities and investment discipline, and greater focus on delivering shareholder value. Move also has what we consider a strong balance sheet. We remind readers that this stock isn't for the faint of heart.
8. Last but not least, notwithstanding the credit crunch, we expect at least one blockbuster (i.e., multibillion-dollar) non-IPO financial transaction in the Internet segment to be announced in 2008. It could be a major acquisition in the content/advertising area. It could be the spin-off of a non-strategic business. Internet companies still largely have very profitable business models and strong balance sheets, and are increasingly focused on delivering shareholder value.
We'll revisit these predictions next January.