Judging by the performance of Internet services over the past year, the world has officially entered the second phase of the mobile computing revolution. In this phase, investors shift their focus away from hardware manufacturers, which have become largely commoditized, to Internet services positioned to benefit from the widespread use of mobile devices.
Clearly, investors have been betting that Internet services will be able to scale up and ultimately profit greatly from the massive installed base of mobile computing devices. After all, they're the group that commands higher margins and faces less competitive pricing pressures than its mobile hardware counterparts.
Mobile green shoots
In the second quarter, 60% of Zillow's (NASDAQ: Z ) 54.3 million average monthly unique visitors engaged on its site from a mobile device, representing an increase of nearly 100% year over year, which helped drive revenues up 69% to $46.9 million. During the conference call, CEO Spencer Rascoff told investors that Zillow now commands a larger market share on mobile than it does on the desktop. What's more, 120 homes are now viewed on Zillow each second from a mobile device.
While these developments are certainly encouraging, Zillow had a rough quarter as far as expenses were concerned. They ballooned more than 116% year over year to $57.3 million as the result of Zillow increasing its headcount related to previous acquisitions, increasing its marketing budget to grow its audience, and a one-time $7.1 million charge related to an accelerated stock-based compensation plan. Excluding the increase in marketing spending and the one-time stock-based compensation expense, costs would been have tamed down to $15.3 million. Consequently, investors were willing to look past the fact that it lost $10.2 million during the quarter because the long-term growth story remains encouraging.
Like Zillow, Yelp (NYSE: YELP ) has also been benefiting from the incredible growth of mobile devices. Yelp's second-quarter earnings results showed its installed base of mobile devices grew by 44% to 10.4 million year over year. Additionally, about 40% of local ads Yelp served and 59% of searches made were to or from a mobile device. With only about 32% of its 108 million unique monthly visitors now engaging from a mobile device, there's a large runway for Yelp to continue growing its mobile presence.
The poster child
If you need further convincing that Internet services will likely continue benefiting from mobile in the years to come, have a look at Facebook's (NASDAQ: FB ) incredible transformation over the past five quarters. Facebook went from earning $0 in mobile, which helps explains why mobile was viewed as such a large threat to its business, to bringing home more than $655 million from mobile last quarter. During this time, Facebook's mobile monthly users increased by more than 67% to 819 million. To tie it all together, Facebook now brings in $0.80 per mobile monthly user, a number that I fully expect will rise as it continues enhancing the mobile user and marketing experience.
Poised for growth
Thanks to the rise of low-cost mobile computing devices, we're now experiencing a similar trajectory to what we saw with declining PC prices over the years. As a result, mobile device manufacturers have grown out of favor and Internet services have become the "it" investment. Despite the massive gains realized by the group over the past year, revenue growth and profitability is still likely within the early stages. Over the long term, I fully expect these businesses to become better at serving its end users, and this will ultimately play a pivotal role in their continued prosperity.
Whether or not this will translate into continued investment prosperity remains to be seen, but I think the longer your time horizon, the better your chances of success. Of the three examples, I think Facebook is likely the safest bet, given its enormous user base, its proven ability to turn business threats into opportunities, and its incredible culture.
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