E-commerce: an elixir for your portfolio in an uncertain economy

At a time when continued growth in the US economy seems less certain, investors often look to overweight industries that can continue to grow.

E-commerce is an industry that fits the bill.

According to Forrester Research, the US e-commerce industry grew 12.6% to $176 billion in 2010 and is expected to grow 60% to $279 billion in 2015.

A combination of factors such as increased use of the Internet and mobile Internet devices and increased consumer value awareness is supporting the growth of e-commerce.

Main segments of the e-commerce industry

Companies in the e-commerce industry can be grouped into four broad segments, e-retail and e-entertainment, online advertising, online travel and related services, and online payment systems.

Electronic commerce and electronic entertainment

High levels of unemployment and high gas prices are driving consumers to shop online. Smartphones and tablets are the most popular items sold online, followed by consumer electronics such as DVDs, e-readers, and electronic gaming devices. E-retailers are offering free shipping to increase sales.

Major names in online retail include Amazon.com (AMZN) and eBay (EBAY). A recent development in the retail e-commerce space is the online distribution of short-lived discount coupons that help local stores drive sales. Groupon has filed an S-1 with the SEC to proceed with an initial public offering.

In the entertainment space, a growing number of consumers prefer to watch movies at home as Internet reliability and download speeds improve. Companies like Netflix (NFLX), which offer online movie rental services, are capitalizing on this trend.

Online advertising

According to e-Marketer, US online ad spend reached $26 billion in 2010. It is projected to grow 20% to $31.3 billion in 2011, driven by growing device usage. Mobile Internet and the growing popularity of online social networks.

While search takes the lion’s share, display ad spend is growing fastest, helped by heavy investments in video format and brand-targeted ads. Display advertising is expected to overtake search in 2015.

Google (GOOG), Yahoo! (YHOO) and Microsoft (MSFT) are major players, while ValueClick (VCLK) is a minor player in this segment. Social media companies like Facebook and LinkedIn (LNKD) are cashing in on increased online ad spending.

Big companies like Google and Microsoft have huge cash reserves to acquire smaller companies and this adds to the investment appeal of the e-commerce industry.

Online travel and related services

Online purchases of airline tickets and hotel room reservations are gaining in popularity. The rapid growth of the economies of Brazil, China, India, Russia and South Korea is driving international travel to these nations. The Department of Commerce estimates that international travel will increase between 6% and 8% between 2010 and 2016.

Online travel companies and related services such as Expedia (EXPE) and Priceline.com (PCLN) will benefit from the increase in international travel.

Online payment systems

Despite the convenience of existing online payment systems like eBay’s PayPal, consumers are concerned about Internet security for online transactions. Such concerns are providing growth opportunities for other players. Google has recently developed an online payment system that allows customers to make payments online simply by waving their mobile phone over the point of sale terminal. Google says that this online payment system does not record any personal customer information.

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