Reuters/Ints Kalnins
- Internet-based businesses have grown strongly for most of the past two decades.
- The industry may be entering a new lower-growth phase now.
- Digital advertising may be the most saturated, while e-commerce could see growth rates moderate.
After two decades of mostly unfettered expansion, the internet's biggest businesses are entering a new period of slower growth.
That's according to Bernstein Research, one of Wall Street's top tech analysis firms.
"There is a general concern amongst Internet investors that core revenue pools may be approaching saturation, with growth at risk of being structurally lower going forward," Bernstein's Mark Shmulik and Nikhil Devnani wrote in a research note this week on the outlook for 2024 and beyond.
Growth rates halved
The analysts looked at growth rates for four of the largest Internet sectors: digital advertising, e-commerce, cloud computing, and ridesharing and delivery.
The expected growth rates for these sectors in 2024 are roughly half the pace of 2019.
"This debate is perhaps most evident in (though not isolated to) digital advertising, where traditional cuts of the market point to a 70%+ online penetration rate," Shmulik and Devnani said.
Wayfair is not alone
In e-commerce, market penetration is now over 20%, excluding food, auto sales, and gas. If this sector tops out at 30% to 40% of total retail, that means it's already halfway along the migration curve.
"It certainly feels like our eCommerce businesses are entering a transition period from new user adoption to retention and re-engagement," the analysts explained, citing Wayfair as an example.
That online furniture retailer has an all-time customer base of more than 85 million. That's "a substantial percentage of the total addressable households — meaning the company now has to increasingly rely on re-acquisition to drive customer growth," Shmulik and Devnani wrote.
"We don't think Wayfair is alone," the analysts added. "We should be prepared for a moderation in growth rates going forward."
Other signs
They cited other signs of a growth slowdown, too.
In recent years, several new apps have topped the download charts, suggesting consumers may be tiring of the core internet services they've relied for a decade.
And some companies have changed their names and mission statements (Meta and Alphabet), while chasing new tech fades such as web3 and the metaverse with an intensity bordering on desperation.
Turf wars
When there's less growth, big tech companies start looking around at adjacent markets and try butting in on each other's turf.
Amazon is starting to sell cars, while going up against Google and Meta in digital advertising.
Google is challenging Microsoft and Amazon in cloud computing. Meanwhile, Microsoft actually tried last year to really challenge Google in Search, and Amazon has actually succeeded in eating into Google's Search business.
Meta is challenging Apple in consumer hardware, with its Oculus devices. Google has been doing the same in mobile hardware with its Pixel gadgets.
In e-commerce, TikTok is trying to grab share from Amazon. In social media, Meta is crowding in on Twitter's patch with Threads.
And now, everyone and their brother are chasing generative AI as the next big tech platform opportunity. They can't all win.
Percentages versus dollars
To be sure, there have been predictions of internet market saturation and Big Tech slowdowns before. Blogger Ben Thompson wrote about "Peak Google" concerns in 2014. The stock has surged more than five-fold since then. Revenue is more than four times higher now.
The internet's underlying markets are "still significant, with demographic and behavioral tailwinds persisting as well," Shmulik and Devnani wrote this week.
And while percentage growth rates are low, there are more dollars of revenue being added, they noted.
In late October, Amazon CEO Andy Jassy addressed concerns about AWS's lower growth rate by focusing on absolute dollars, rather than percentages.
"If you look at AWS, we grew 12% year-over-year. And I think that you saw a continued stabilization of our year-over-year growth rate. And that included $919 million of incremental quarter-over-quarter revenue," he said, according to a transcript of Amazon's third-quarter earnings conference call. "As far as we can tell, that also looks like the most absolute growth of any of the players out there."
When Big Tech executives start talking about dollar growth, rather than percentages, that's a worrying sign.
For one, it shows the law of large numbers kicking in. AWS is so huge now that it's harder to grow revenue at 30% and 40% a year (which AWS has doing just a couple of years ago).
But it's also a concern for investors because Amazon has a market value of more than $1.5 trillion these days. That massive valuation is partly supported by expectations of strong future growth — in percentage terms not just dollars.