16% Increase In Google Android Activations Translates To 350,000 Per Day; Signals Rapid Acceleration In Mobile Advertising Opportunities Says UBS Investment Bank Executive Director
April 11, 2011 - The Wall Street Transcript has just published 2011-04-04: Internet Services Report offering a timely review of the Internet sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Brian J. Pitz is an Executive Director and a Senior Research Analyst in equity research at UBS Investment Bank, where he covers the Internet and interactive entertainment. Previously, he was a Principal and a Senior Research Analyst covering the Internet at Banc of America Securities LLC. Prior to that Mr. Pitz was a Vice President at Morgan Stanley, where he co-covered Internet & PC applications software, and led coverage of the interactive entertainment sector. Mr. Pitz commenced his professional career as a Consultant in the business consulting practice of Arthur Andersen LLP in New York City.
TWST: Where do you focus your attention in the Internet services space these days?
Mr. Pitz: We cover Internet companies, including online advertising and marketing services, e-commerce, mobile, mobile Internet, as well as interactive entertainment, which includes video game companies such as Electronic Arts (ERTS) and Activision (ATVI).
TWST: Generally speaking, what are some of the trends and developments in the space for the rest of 2011?
Mr. Pitz: I think general trends include the proliferation of mobile devices. We have seen Google is now activating 350,000 Android devices daily. That's up from 300,000 several months ago and roughly 60,000 a year ago, so a significant acceleration in mobile. We are seeing Google also serve over two billion ad impressions a day through AdMob, which serves display advertising into applications on mobile devices. We are seeing Google post over $1 billion in revenue from mobile alone, over $2.5 billion in display, so we think display advertising is also at a big inflection point as companies like Procter And Gamble (PG) and other consumer products companies are opening up their budgets and spending more online. Twelve years ago that money may have gone to Yahoo! (YHOO) or AOL (AOL). I think it's now being focused on social media platforms too, on sites such as Facebook or Twitter, as well as Google, which offers some performance-based display advertising products.
TWST: Generally speaking, where are valuations in the space?
Mr. Pitz: We think there is a divergence between the private-company valuations that we are seeing versus the current public-company valuations, and we would highlight Google as one of the cheapest names in technology right now across the board. So as more of these private companies come to market, we think it could actually bring the multiples up for some of the higher-growth public players that have been around for a while.
TWST: As you talk with investors, do you see a lot interest in the space and has that changed in the past few months?
Mr. Pitz: We think investors appreciate the growth opportunity in the space. We've been a little surprised that some of the bigger names like Google have underperformed, and again we would underscore that Google is our favorite name of all the names that we cover as we head into the back half of this year, as well as for the next several years. We think some investors worry about what Facebook could do in terms of competing with Google. But we think from a search perspective, Google has a significant lead, and Facebook may have to spend a fair amount of money - or partner closer with Microsoft - to really be a major player in search.
TWST: Besides Google, where are you pointing investors now? What are some of your other favorite stories?
Mr. Pitz: We like eBay, as a larger-cap play on e-commerce. We also like a company called QuinStreet (QNST). It's a smaller-cap name, the ticker is QNST. That's an online lead provider. They are mainly focused on the paid education and financial services verticals. We like the quality of their leads that they have delivered for years. We've known this company for a while, and it recently went public last year. The stock has performed well year to date, but we think it still has a lot of growth opportunity in the long run.
TWST: Are there any others you focus on?
Mr. Pitz: Yes, we focus on interactive entertainment side. We like both Electronic Arts and Activision. We think those companies are cheap relative to historic multiples. There have definitely been some changes in the video game industry as more and more people are playing casual and social games online. Clearly the revenue model is evolving, but we think Electronic Arts is in a good position to benefit from this transition. They've also got a game coming out in the back half of the year. "Star Wars: The Old Republic" is a new MMO, massive multiplayer online, title that could compete with World of Warcraft - potentially the first legitimate competitor, we believe. When you look at Activision, they own World of Warcraft, the current MMO leader, but they also have the Call of Duty franchise, which is pretty unstoppable right now. That stock also looks relatively cheap on a multiple basis, especially considering they've got a $1.5 billion buyback outstanding, so we think that stock has a pretty good floor on it. Finally, to some extent we believe investors have not been focusing on the video gaming space recently, so it's somewhat underowned relative to the Internet names.
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