I have an optimistic outlook on the Internet media sector in 2014 driven by what I believe will be consistent revenue beats due to advertising budgets finally coming into alignment with just how much time we spend on the Internet.
The revenue beats will be driven by what are relatively modest revenue targets for leading companies like Facebook (FB) and Twitter (TWTR) - just $10.4 billion and $1.1 billion, respectively. These seem like small numbers given the massive user volumes and time spent on both of these networks. The usage is there, but the ad budgets are not proportional.
In the United States, for example, people are now spend 5 hours and 16 minutes a day on the Internet (more than half of that was mobile) and 4 hours and 31 minutes watching TV. Yet digital only gets 22 percent of the ad dollars. I don't think this can stand. Major Fortune 500 marketers are increasingly recognizing this gap, and the efficiency of Internet advertising for both direct response and brand advertising. One more example of this gap, Spending on digital-video advertising in 2013 is estimated at about $4 billion, compared to $60+ billion on television, according to digital-media-research firm eMarketer.
What a missed opportunity.
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I think 2014 will be a year where Facebook, Twitter, YouTube (Google (GOOG)), and Linkedin (LNKD) work to aggressively close this gap. These companies have already positioned themselves as a second-screen viewing experience while watching TV, and in the case of YouTube, a TV alternative.
I also have an expansive view of media companies to include those that have content that allow us to more efficiently and enjoyably spend our leisure time or research aspects of daily life. To that end, there are also mid-cap names like Yelp (YELP) and Zillow (NASDAQ:Z) that will benefit from this big shift in media consumption.
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With some exception, these companies are not capital intensive and profitability is only hampered or dampened by investment in growth. That's the opposite of what many of the established public companies are experiencing: They are stockpiling cash because they lack investment opportunities.
Also, in some cases, stock-based compensation is the profitability dampener, which is really being a victim of your own rising stock price. What I really want to see is these companies spend on sales force expansion to close the ad-budget gap. I would view increasing the size of their sales force, consulting more with brands and conducting research as bullish indicators for any of these companies.
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Some of these valuations on a multiple basis are rich, don't get me wrong. Google and Facebook, for example, are still much "cheaper" than Twitter on almost any multiple comparison. But I think 2014 will be a year when many of these stocks grow into prices that are akin to a pair of pants being too big for kid. The question will be whether they simply fill out these pants or the market immediately puts them in a new set of "too big" pants.
-By Jon Steinberg
Jon Steinberg is the president & chief operating officer of BuzzFeed and is responsible for all business management, company operations, finance, and social advertising operations. Follow him on Twitter @jonsteinberg.