Macro factors currently driving the economy, such as inflation, interest rates, labor markets, supply chain issues and so forth have a varied impact on players in the extremely diverse Internet – Services industry, although a stronger economy is generally positive. Therefore, the ongoing tariff war, declining consumer confidence and declining Producer Price Index (PPI) figures may be considered negative for the industry.
Our picks are Baidu BIDU, Dropbox DBX and Crexendo CXDO. Most industry players are heavily investing in artificial intelligence (AI) and machine learning, as this allows them to provide additional features and differentiate their offerings. Being a capital-intensive industry with high fixed costs of operation and the fairly constant need to build infrastructure, a high interest rate just isn’t very positive for it. Therefore, any rate cuts this year would make us incrementally positive about the Internet Services industry.
About the Industry
Internet – Services companies are primarily those that rely on huge software and hardware infrastructure, referred to as their properties, to deliver various services to consumers. People can avail the services by accessing these properties with their personal connected devices from almost anywhere in the world.
Companies generally operate two models: an ad-based model and an ad-free model, where the service is charged. Alphabet, Baidu and Akamai are some of the larger players while Crexendo, Upwork, Dropbox, Etsy, Shopify, Uber, Lyft and Trivago are some of the emerging players. Very large players (mainly Alphabet) tend to skew averages. Because of the diversity of services offered, it is difficult to identify industrywide factors that could affect all players. The effect of macro factors such as inflation, rate hikes, supply chain issues and so forth vary by company.
Factors Determining Industry Performance
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Data is central to success in this industry, as it allows the players to build artificial intelligence (AI) models to improve the quality of services, create new technologies and services, and also to lower the cost of operation. While not all businesses are built on the same scale or have the same customer reach, AI tools are increasingly helping organizations of every size. They are tremendously increasing operational efficiency and the scope for growth. Internet service providers are also able to differentiate their product based on the scale, flexibility and choice in AI-powered tools that they offer. Larger companies often have the edge in AI because they have access to larger data sets that can be processed to further develop their AI.
