Internet Content Stock Outlook: Regulations To Dull Growth

The Zacks Internet – Content Industry comprises companies with diversified end-markets. The industry includes providers of video encoding platform, personal services, Internet content & information, staffing & outsourcing services, publishing, capital markets and media-based companies.

Moreover, apart from the United States, a number of companies in this industry are domiciled in the Netherlands, Israel, United Kingdom, Germany and China.

The Zacks Internet - Content industry is characterized by rapid technological change, frequent new product and service introductions, and evolving industry standards. However, the industry is susceptible to consumer spending trends. Moreover, industry participants are increasingly facing regulation particularly in China and the European Union (EU).

China has been very sensitive regarding Internet use over the years. The Chinese government has imposed significant restrictions on online search and other social-networking activities by blocking popular websites such as Twitter, YouTube and Facebook (FB).

It also has a number of regulations related to direct advertising in China, which is the major revenue source for these companies. On Jun 1, 2017, China implemented a tougher cyber security law which gives the government stronger control over online content.

Moreover, post Facebook’s Cambridge Analytica scandal that affected 87 million users, the industry participants have been facing rigorous scrutiny in the United States as well as the European Union (EU).

The implementation of General Data Protection Regulation (GDPR) that took effect from May 25 in the EU is already hurting industry participants. GDPR ensures that users know, understand, and consent to the data collected about them. Internet companies have to keep consumers informed about why the data is being collected and whether it will be used to create profiles of people’s actions and habits.

Moreover, the latest EU Copyright Directive aims at charging U.S. Internet giants for using content from news outlets as well as to use filters and prevent uploading of content that is copyrighted.

Further, regulations to curb terrorist and extremist content are expected to be implemented within a short-span of time in the EU region. Reportedly, if companies fail to remove such content they could face sanctions.

Industry Lags on Shareholder Returns

Looking at shareholder returns over the past year, it appears that a tough operating environment has been hurting investor sentiments in the Internet - Content industry’s growth prospects.

The Zacks Internet - Content Industry, within the broader Zacks Computer And Technology Sector, has underperformed both the S&P 500 and its own sector over the past year.

While the stocks in this industry have collectively lost 16.6%, the Zacks S&P 500 Composite and Zacks Computer And Technology Sector have rallied 16.3% and 17.6%, respectively.

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