Inuvo, Shopify: High-Quality Plays on Internet Services
- INUV
- SHOP
The ongoing digitization of the globe is expected to continue as an increasing number of consumers and businesses move online. This requires facilitating products, services and infrastructure that are provided by the extremely diverse Internet – Services industry. While this diversity makes it somewhat difficult to identify drivers that may be applicable to all players, a stronger economy is generally positive. Therefore, the ongoing war and declining consumer confidence (mainly related to tariffs, inflation and jobs) may be considered negative.
Our picks are Inuvo (INUV) and Shopify (SHOP) because these are high-quality businesses with innovative technology that may be able to continue growing despite macro headwinds. Inuvo is a riskier bet because of its size but Shopify has an attractive competitive moat that is hard to replicate. Both have AI at the heart.
Most industry players are heavily investing in artificial intelligence and machine learning as this allows them to provide additional features and differentiate their offerings. Being a capital-intensive industry with high fixed cost of operation and the fairly constant need to build infrastructure, a high interest rate isn’t conducive to business growth. Therefore, a hawkish Fed is just not very good news for the Internet Services industry.
Valuation has come down significantly over the past six months, which along with rising estimates indicate the existence of opportunities.
Internet – Services companies are primarily those that rely on huge software and hardware infrastructure, referred to as their properties, to deliver various products, services and infrastructure to individual or corporate consumers. Given the increased digitalization of the world and the industry’s role as a digital enabler, the range of offerings is very broad and may include ecommerce, search, social networking, cloud-based software, collaboration and business productivity solutions.
Companies generally operate two models: ad-based and ad-free (subscriptions, licenses, usage-based, fees-based). 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.
Factors Determining Industry Performance
-
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. AI is changing the way these companies operate: search is becoming conversational, content creation is becoming automated, AI agents are performing various tasks and personalized recommendations are now available at scale. Internet service providers are also able to differentiate their products based on the scale, flexibility and choice in AI-powered tools that they offer. The market is extremely competitive and smaller tools are getting commoditized. User interfaces across the web are being redesigned to adopt these changes. 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.
-
Secular growth drivers continue to play out. Digitization is increasing across the world, meaning that both work and entertainment continue to move online, leading to increasing Internet penetration, cloud adoption and mobile commerce. At the same time, international borders are increasingly melting away, driving cross-border flow of goods and services. This represents huge growth potential. Gen Z and younger populations are accustomed to doing most things online, which means that this trend can only accelerate. As digitization redefines identities, relationships and transactions, it will create both opportunities (like security software) and risks (like privacy concerns and increased competition).
