When Internet Growth Collapses

Any investor knows that the Internet means growth potential. Growth potential, after all, is why many Internet stocks have confounding valuations. A company that does not turn a profit and made only $600 million in revenue last year can be worth $26 billion? Yes, Twitter proves that. And helping prop up that valuation is a user base of roughly 250 million growing 30% year over year.

Where do these new users that help sell a company's potential come from?

A vast majority originated from the unconnected population. In 2000, about 43% of Americans used the Internet. In 2012, over 80% of Americans used the Internet. That's over 130 million new Internet users looking for Web services for the first time -- and that is only in America. Other developed countries experienced an even more dramatic growth curve over those years: 

The world is now getting to a point where most developed nations, which typically contribute the highest value users, have passed peak growth rates. And even when adding developing countries, Horace Dediu of Asymco estimates that global growth of Internet users will reach an inflection point in 2016. After that, Internet user growth will slow.

What effect will this have on the companies that have relied on this once-in-human-history trend?

To find out, we can look at some parallels in a recently decelerated industry.

Mobile phones recent stall
Cell phones, and particularly smartphones, have been adopted faster than most other consumer technologies in history:

Once smartphones crossed the 50% household penetration in 2012, handset makers struggled with sales growth. Apple  iPhone quarterly sales growth was only been between 3% and 17% in its fiscal 2013, compared with growth between 21% and 85% in 2012 and 20% and 146% in 2011. In 2012, coincidentally, Apple hit its highest share price ever around $700 before falling to hover around the $400 and $500 ranges.

And even while Apple cashed in on the last of mobile's growth, its competitors fell off the face of the Earth or have been acquired by others.

Now, as USA TODAYsummarizes, "[F]uture growth in the smartphone market -- as with those for PCs and other consumer tech products that came before -- will be driven less by high-priced innovation and more by buyers who are either replacing existing devices or focused on price, not snazzy new features."

Back to the net
How would such growth-slowing manifest itself among today's Internet-focused firms? It all depends on expectations.

For companies that have sold a story of continued user growth, if users have yet to adopt their platform or service it's likely the trickle of new Internet users won't help. And the trends that are in place now will stick unless met with intense disruption.

This means that Twitter will always have 44% of users never tweeting. And the slowing user growth will continue to slow -- while it was once over 140% year over year in early 2011, the latest quarter marked only 30% total user growth as mentioned above. And in the U.S. growth was lower at 20%.

The bar for new Internet companies winning over customers from existing services will be higher, as fresh users open to anything will be few and far between. This is good news for incumbents, although they will have to work harder at extracting more value from level user bases.

A new cycle
Hype will never leave the stock market and we've already seen traditionally stale industries like transportation and energy grab their share of the usually Internet-focused spotlight. The Internet will always have the capability to connect billions in an instant, which could always mean explosive growth worthy of hype. But when no one is new to the Internet, new companies will have to prove themselves a bit more before showing billion-dollar valuations on top of net losses.

R.I.P. Internet -- 1969-2014

At only 45 years old... the Internet will be laid to rest in 2014. And Silicon Valley is thrilled. Because they know... The Economist believes the death of the Internet "will be transformative." In fact, the CEO of Cisco Systems -- one of the largest tech companies on the planet -- says somebody's going to bank "14.4 trillion in profit from one concept alone."

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The article When Internet Growth Collapses originally appeared on Fool.com.

Dan Newman owns shares of Apple. The Motley Fool recommends Apple and Twitter. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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