Social media and mobile devices have changed how people interact with each other online. As a result, the economics of computer-enabled marketing has also changed. Investors should never concentrate their investments in any single web marketing stock when platform changes and shake-ups are to be expected. Instead, investors who want exposure to this sector should diversify horizontally across companies that buy traffic and that experiment with finding clients from different media sources.
Two pillars of the Internet economy are advertisement revenues and lead generation. Website traffic has been monetized in one of two main ways: by selling viewer attention through advertisements such as banner ads, or by connecting them with vendors they might be interested in. Each connection is a "referral" or "lead." Leads are value-added products. A viewer can click on a banner and fill out a form, a process that transforms an impression to a click action to a lead. Sales leads can also be generated from raw data harvested from the Internet, social media, or proprietary databases.
Social media and mobile devices are now more commonly used to connect and search the web than personal computer-based search engine queries. The rise of Web 2.0 has fundamentally changed the economics of the web. In an article titled, "The next wave of digital growth is here", Todd Harrison wrote for MarketWatch that web portal usage is down 24%, while social has grown 52%. These changes demonstrate how the economy of the Net is fundamentally changing. New developments in the "hypernet" threaten to disrupt media consumption through web search as much as the Internet disrupted television. These changes are substantial and promise to continue. This top-down driver should inspire investors to consider Web 2.0 ventures, but they should exercise discipline and wait for reliable earnings and attractive valuations before riding "the next wave."
Changing Bargaining Power
This shift from search-dominated in traffic to multiple traffic sources, including social media, has the potential to turn the tables on negotiations between lead generation companies and search advertising companies.
Lead generation lacks a dominant market leader. The lead generation market share is more fragmented between many small competitors like QuinStreet (QNST) and private companies like Vendisys. Vendisys is a cloud-based B2B lead generation firm. The company promises users an easy way to generate business leads based on a unique cloud model. Vendisys solves the problem of finding a business that is actually interested in an offer at the right time. Vendisys also solves the issue of finding the right person or people who can actually make the decisions, instead of passing the question on to another department.
Purchasing live leads can effectively outsource many typical marketing activities, including advertising, cold-calling, and appointment setting. Online browsing for real estate is a form of lead generation in which sites like Trulia (TRLA) and Zillow (Z) provide mortgage brokers and real estate agents with data about interested prospective clients. Each data-rich client referral is a lead. Online travel search portals like Expedia (EXPE) and Priceline (PCLN) are similar in that they effectively direct traffic from search to online forms. In contrast to the search advertising market or social media advertising market, lead generation has not become to be a winner-take-most market. In contrast, multiple competitors coexist, even inside the same category.
With this in mind, we can consider the traffic conversion and lead generation companies that have stand to benefit from this competition. Many of them are pricey:
Expedia and QuinStreet are trading at lower price-to-free cash flow and price-to-sale multiples than their peers. QuinStreet is particularly attractive since its internally developed intangible assets like trademarks, patents, and brands are not captured on the balance sheet. Thus, its below book value market capitalization demonstrates that you can buy these assets essentially for free after buying the firm's accounting net assets at a 26% discount.
Investors should consider small positions in QuinStreet or Expedia as speculative bets on a shake-up in web marketing.