CITIC Securities 2Q2024 US Internet Performance Outlook: Continuing in the prosperity cycle AI import accelerates

According to the Wise Finance APP, CITIC Securities published a research report stating that benefiting from the resilience of the European and American macroeconomy, as well as the introduction of AI technology, the second-quarter earnings of the US Internet sector are expected to continue the steady performance of the past few quarters. Online advertising and e-commerce, as the most certain sub-sectors, are not only benefiting from the resilience of the macroeconomy, but also the gradual acceleration of AI upgrades to recommendation systems. Additionally, events such as sports events and elections will drive additional demand. The streaming media industry is gradually overcoming the headwinds of content shortages, with major platforms accelerating their expansion in areas such as low-priced memberships and advertising. Considering the continuous improvement in the free cash flow of Internet companies, companies that have not yet repurchased shares are also expected to follow suit. In terms of valuation, the valuations of major Internet companies have increased compared to the previous quarter, reflecting the market's optimism about the high certainty and growth prospects of the companies' mid-term performance, with overall valuations still in a reasonable range.

Second Quarter Report: Continues to benefit from the resilience of the macroeconomy and the introduction of AI technology.

In the second quarter, the overall North American macroeconomy continued its strong performance from the previous quarter, with the Fed maintaining its forecast for the US 2024 full-year GDP growth rate (2%) in June, and outstanding retail data in April and May. Since June, consumer data has remained strong, with US Redbook retail sales accelerating to nearly 6% year-on-year, and comparable sales for KeMai in May maintaining first-quarter levels, demonstrating the high resilience of the US consumer market. CITIC Securities also observed that leading Internet companies continue to update their applications in the field of AI. CITIC Securities believes that the combination of macroeconomic resilience and AI increment will continue to support the overall performance of the US Internet sector.

Tech Giants: Overall expected to exceed expectations in the second quarter.

Based on the data observed by CITIC Securities in the second quarter, traffic, consumption, and other data for leading tech giants are positive, with the integration of AI recommendation systems expected to accelerate. Additionally, Chinese outbound apps that previously reduced advertising in the North American market have increased their advertising in other global markets, partially offsetting the impact of the US market contraction. On the profit side, the three major Internet companies have different quarterly rhythms in personnel optimization, but overall, operating profits are likely to continue to improve. Looking ahead, CITIC Securities believes that although there are pulses of sports and political events in the second and third quarters, factors such as base effects, economic cycles, and capital expenditure returns make the guidance of the giants for the third and fourth quarters more important.

Other Areas: Streaming media focuses on advertising increments, while local life focuses on optimizing the competitive landscape in the second half of the year.

In the streaming media sector, CITIC Securities expects user growth for major companies in the second quarter to exceed expectations, but the competitive landscape in the third quarter needs to be observed: 1) the headwinds of content shortages are easing; 2) video advertising is expected to accelerate with the release of content, contributing to a certain scale of revenue; 3) Disney plans to launch an action against account sharing in September, which may change the competitive landscape. In the local life sector, the main companies' demand remains stable, the process of reducing losses continues to progress smoothly, but in the short term, attention needs to be paid to the possibility of weakening optional consumption in North America, the possibility of easing competition in Latin America in the second half of the year, and the impact of overseas Robotaxi progress on business models Risk Factors:

Risks caused by the repeated deterioration of US inflation; risks of valuation decline due to rising long-term interest rates; risks of weakened consumption due to soft macroeconomic conditions in the US; risks of cash flow and profit pressure due to new business investments; risks of anti-monopoly, data privacy regulations, and other regulatory issues; risks arising from changes in industry competition dynamics, etc.

Investment Strategy:

CITIC Securities predicts that the performance of the US Internet sector in the second quarter remains relatively stable. In the short term, as earnings expectations are revised upwards, the stock prices of related companies are expected to rise in tandem. In the medium term, with the introduction of AI and the improvement of operational efficiency, there is still room for upward revision in the overall valuation level of the Internet sector