Due to the rise of smartphones and tablets, a lot of internet traffic shifted from the traditional desktop towards mobile usage. However, a large number of internet companies struggle to monetize mobile traffic. Now, analysts of Deutsche Bank Markets Research found “The Rule of 50%” that helps explaining why a couple of internet companies turned mobile headwind into tailwind. After mobile usage hits a 50% share in traffic, companies are said to be able to substantially increase revenues and margins. More importantly, this rule and accompanying inflection point could be a great driver for the stock price of internet companies.
Traditional internet revenues are for most companies, such as Alphabet (Google-parent), Twitter and Facebook, largely based on ads. To generate revenues from desktop usage, internet companies implemented banners on their website. Since mobile websites display content on much smaller screens, many struggle to implement ads on mobile platforms. Banners are experienced as annoying by most mobile users. As a result, the tendency from users to shift to mobile platforms caused significant challenges for internet companies and still does today. Finding a way to monetize mobile traffic often requires investments and allocations towards a mobile strategy, resulting in margin pressure. A company has no other choice than go through this transition, since more and more traffic is taken place through mobile platforms. Presence in emerging and frontier markets even underlines the need for mobile monetization, since in these markets consumers often do not have desktop access but do have a smartphone. Not having a proper mobile app and accompanying conversion tools prevents a large group of consumers to get familiar with the company.
The analysts of DB proved their thesis by using Facebook as an example. A couple of years ago, this company was struggling with mobile traffic, despite already being quite popular among desktop users. This was in the time shortly after the company went public in May 2012. Facebook wasn’t able to monetize mobile usage at all. Also overall revenue growth was severely under pressure at that time. But even once the company was able to offer its users a decent mobile application, the company wasn’t able to profit from mobile usage. Nevertheless, once Facebook moved away from display ads to sponsored stories, mobile ad revenues started to flow in. Not much later, the company crossed the 50% threshold and this was followed by a surge in revenue growth. This development was also reflected in Facebook’s share price. During the transition phase, the stock was bottoming and therefore the 50% threshold was a clear inflection point. As by a nice coincidence, DB points to the fact that Facebook’s share price increased with 50% after hitting the inflection point.
Now most tech investors are aware that a company’s effort in mobile platforms is often accompanied by struggles in monetization. However, “The Rule of 50%” could offer a solid perspective on how to evaluate companies in their mobile efforts in relation with the respective stock prices. But there’s a danger to oversimplify the Rule. Not all companies have the same type of mobile traffic. Facebook and Alphabet are not selling their own products through their platforms. Companies like Amazon or travel agents do and therefore have different incentives to convert mobile usage into revenues. For example, Expedia or TripAdvisor have a significant discrepancy in mobile traffic and actual mobile shoppers. It would be unfair to compare these companies to the advertising business of the likes of Facebook, Twitter and Alphabet trough Google.
Notwithstanding above described differences in mobile business, investors may look now with better insight to current monetization of mobile usage and margins. “The Rule of 50%” offers a decent take on how revenues and margins relate to desktop and mobile platforms. Look for strong pickups in mobile traffic and how this relates to mobile revenues. Although we should realize that this is only a part of a company’s valuation and market trends are sensitive to more factors.