Summary

We believe that the internet industry still has a very long secular runway with digital marketing being 30% of total ad spending and ecommerce being 10% of total retail sales. For on-line advertising, we believe the shift to TV is the next green field opportunity at about 40% ad spend globally, driven by increased adoption of video advertising in mobile and messaging. For ecommerce, we believe that the convergence with advertising will drive further penetration, leveraging search adverting on the commerce platform to optimize conversions and voice search to enable brands selling direct to consumers. We are resuming coverage with Buy ratings on FB with a PT of $230, Alphabet with a PT of $1,220, and Amazon with a PT of $1,250. We rate TWTR and eBay Underperform with a PT of $34 and $14.50, respectively.

Key Points

Expect more time spend on mobile, driven by video and mobile messaging. Mobile is now commanding 26% of time spent on media, compared to 8% in 2011. Going forward, we expect the usage of mobile to accelerate due to increased usage in video consumption from live streaming and mobile messaging as the app becomes a utility. By 2021, we expect mobile to command 44% of media time spend. Total digital time spend would surpass 65% from 47% in 2016. However, eMarketers estimates that digital ad spend will command at 48% of ad spending at 2021, or $124bn in ad spending, leaving a potential upside of nearly 35%.

Secular shift from TV to online video advertising. We feel the biggest opportunity for mobile and digital to increase their overall ad budget penetration is against TV at 36% of US media spend and to a less extent, other traditional media platforms like print at 14% and directories at 2%. Although the shift from TV to online has been slow over the last few years, we see several indicators that could drive the shift faster including comparable measurement metrics for TV and online, and CPG advertising running parallel campaigns on TV and online.

Convergence of commerce and advertising: We are also seeing an Amazon and eBay introduced sponsored ads in their respective search results. In addition, we see voice search such as Amazon’s Alexa as the next OS and a potentially a powerful advertising platform, allowing brands to sell to consumers directly. CPG represents the largest opportunity for ecommerce at total retail sales at nearly $9.6tn globally and <1% of ecommerce penetration. (continued)

Top picks:

1) FB: Buy rating and a $230 PT. The company will be a primary beneficiary of time spent shifting onto mobile and video, taking share away from TV and traditional advertising. We estimate that new products yield 70% upside to revenue per user in 2019.

2) GOOGL: Buy rating and a $1,220 PT. Google has a diversified list of products that are not yet fully optimizing for monetization, including video, mobile search, travel meta search, mobile app advertising, and Cloud computing. Our upside analysis indicates nearly 30% potential to our rev/user estimate in 2019.

3) AMZN: Buy rating and a $1,250 PT. The company benefits from being a dominant player in ecommerce and cloud computing that have only 10% and 5% penetration rates, respectively. In addition, we see the convergence and advertising will deliver the next pillar of growth. Our upside analysis indicates nearly 35% potential to our EBITDA estimate in 2019.

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