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Goldman's 10 industry themes for 2024 - Part 2

Published 2024/06/05, 17:02
© Reuters

Investing.com - The quarterly earnings season has largely ended, and Goldman Sachs has taken this opportunity to revisit its top 10 investing themes for 2024, and the stocks in focus in conjunction with these themes. The first five topics can be seen here, and these are the final five themes:

Cloud computing return to normal

Investors have been gaining greater confidence in the ability of certain headwinds to cloud revenue growth over the past 12-18 months normalizing, and thus attention for 2024/2025 is shifting to trying to gain a better understanding of how building momentum in artificial intelligence workloads & AI related services could contribute to growth and margins going forward.

“We still see the long-term adoption of cloud computing services by enterprise customers as a secular theme due to broad-based increases of digital spending and shifts in IT budgets toward cloud adoption,” said analysts at Goldman, in a note dated May 17.

With meaningful revenue backlog, we see the broader public cloud landscape evolving from simply being a conversation around cost savings/efficiency to being an essential piece of driving growth for customers through utilization of AI-related offerings, operationally/industry specific solutions & partner integrations, all of which have a goal of improving the extraction & utilization of data to drive business outcomes while keeping that data secure.

In addition, companies have expressed optimism that AI workloads could build in momentum as a tailwind for 2024 & beyond.

Goldman sees the tech giants Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOGL) as the most exposed to this potential upside.

Normalization of online travel demand

The multi-year period of abnormal travel growth, caused by COVID and then the associated pent-up demand, is coming to an end, and Goldman sees structural growth for the online travel industry returning to pre-COVID levels in the high-single-digit/low-double-digit percentage range.

As growth normalizes, online travel agencies are increasingly focused on a number of initiatives to drive brand loyalty, less reliance on performance advertising, including investing in loyalty programs and merchandising/discounts direct to consumers.

“We believe generative AI has the potential to reshape the online travel funnel and how companies approach customer acquisition & conversion,” said analysts at Goldman Sachs.

Additionally, “we are witnessing a greater focus on capital returns with online travel companies increasingly buying back stock (or announcing shareholder return authorizations that have surprised to the upside).”

The stocks most exposed to these themes include Expedia (NASDAQ:EXPE), Booking Holdings (NASDAQ:BKNG), Airbnb (NASDAQ:ABNB) and Tripadvisor (NASDAQ:TRIP).

Evolution of interactive entertainment

The bank sees the potential rise of a hybrid distribution model of mobile/cloud as well as the potential emergence of VR/AR [virtual reality/augmented reality] physical equipment as the next generation of distribution and interfaces, albeit while acknowledging the inherent technological challenges limiting pace of adoption.

The other distribution mode that we will continue to monitor is whether any industry participant is able to successfully build enough scale of content to capitalize on the subscription-ification of the consumer Internet.

With consumers increasingly shifting consumption habits to short-form video and gaming, we have seen companies focus on a few themes in an effort to capitalize on evolving consumer behavior: The addition of new verticals by large scaled platforms (e.g., Netflix (NASDAQ:NFLX) expanding into gaming, and Spotify (NYSE:SPOT) expanding into audiobooks & podcasts); expanding distribution channels and touchpoints (e.g., Take-Two's (NASDAQ:TTWO) partnership with Netflix on Grand Theft Auto mobile games); the emergence of cloud gaming; and the extension of key intellectual property (e.g., Netflix TV series around Take-Two/Ubisoft franchises).

“Looking longer-term, we expect large-scaled platforms to be the best positioned to capitalize on the aforementioned trends given the scale of consumers which provides greater leverage on fixed content costs, the breadth and depth of content library providing abundance of consumer choice, and rising pricing power as more value is delivered to consumers,” said Goldman Sachs.

Shifting industry momentum

Looking to the remainder of the year, the bank sees Internet companies focused on the following themes: executing against a more normalized revenue backdrop; mixed margin outlooks; and a renewed commitment to shareholder returns, with several companies announcing new buyback authorizations and/or dividends.

A key debate for investors will be how online penetration rates continue to evolve from these higher levels and how this translates back into the remaining secular growth runway of companies within these verticals.

The maturation of end markets is contributing to a step-up in competitive intensity, with companies increasingly focused on a mixture of demand/supply incentives and the launch of new products/adjacencies to help sustain revenue growth, broaden platform offerings, and deepen customer relationships.

Additionally, companies are earmarking an increasing amount of capital towards shareholder returns, with the sector returning $111 billion in 2023 (99% through buybacks) and with nearly $200 billion in remaining buyback authorization still waiting to be deployed.

“We expect companies to continue to use shareholder returns in the years ahead, with this likely to support a continued broadening of their investor base,” Goldman added.

Regulatory matters and business practices

The rise of government and regulators’ focus on the business practices of the industry’s scaled players has been a persistent theme in recent years, said analysts at the investment bank, seeing three potential areas of risk.

The bank cited “headline noise” if investigations, fines and new rules proliferate; rising costs to comply with an array of global initiatives; and headwinds to any in-market consolidation or strategic M&A by large players, causing the industry to lean back on internal product R&D.

Over the short/medium term, the regulatory focus on antitrust issues continues to be the biggest area of uncertainty, citing the U.S. Department of Justice lawsuit against Google; the U.S. Federal Trade Commission lawsuit against Amazon; and the U.S. DOJ lawsuit against Google as well as the European Commission statement of objections against Google.

Such scrutiny of the largest companies is likely to persist, “and we expect that investors will remain acutely focused on ‘headline risk’ and watch for new developments.”

In addition, the increased number of antitrust-related regulatory developments in recent months/years has created an increased degree of uncertainty and volatility around potential long-term business structure and market share dynamics, particularly if it results in “structural” remedies being enforced.

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