Return of the Internet stocks 0 comments

(P.S: Sorry for any disturbances the advertisements above may have caused you)
The Nasdaq IPO of Baidu.com, a popular search engine company from China, was a tremendous success, its share price quadrupling from the offer price as of today (and PE of >2000!). It was probably the second recent Internet IPO success story, following Google's own IPO last year; Google's share price itself has tripled to its current price at around US$300, valuing it at about 80 times earnings.

The euphoria surrounding these new Internet IPOs smells of Internet fever all over again. But nowadays people are more rational; many are still reeling financially from the burst of the Internet bubble five years back. The valuations might be a bit on the high side, but Baidu, although likely to correct from its price surge, captures the essence of a rising China with potentially explosive Internet-based business growth (given China's population and high popularity of the Internet among the young --- one only has to go to a typical LAN centre in China --- always full ---to find out), while Google, of course, is king of the search engines with consistently outperforming earnings growth to match.

The burst of the bubble has led to a process of natural selection, with those having poor business models falling aside while the stronger ones like Yahoo!, E-bay and Amazon have survived and become beacons of the Internet sector. The sector itself has grown more mainstream, with models like e-commerce, Internet banking and online music downloads now becoming commonplace and more importantly, commercially viable. Security was a big issue, in the areas of payment and confidentiality of personal information; nowadays public acceptance of Internet transactions has grown together with the improvements made in enhancing online security. It appears that the promise the Internet held has indeed materialised in many arenas.

To me, there are two probable trends that will anchor a further rise of the Internet sector. Firstly, the continued strengthening in the global economy will lead to consumption growth and with it, increased advertising by companies. Advertising is arguably one of the most cyclical sectors, and will do well in a consumption boom. With it, online advertising rates will continue to rise; online search ad rates rose an average of 25-30% last year. That is the bread and butter of most Internet stocks, and thus bodes well for their future earnings.

Secondly, there is a likely consolidation of the sector. Both the big Internet companies and "bricks-and-mortar" companies are looking to acquire smaller Internet companies that could be synergistic to their business. Some significant deals this year include IAC/Interactive, a big interactive commerce player formerly owned by Vivendi, purchasing search site Askjeeves.com; the New York Times buying an information site About.com; Dow Jones & Co. buying investing site Marketwatch.com. Yahoo is reportedly considering buying Alibaba.com, a China search portal. This spate of deals has led to analysts predicting more acquisitions down the road, most likely involving second-liner Internet companies being acquired. And of course, don't forget Microsoft and its ever-ready checkbook, particularly as they are looking to hedge on the Internet as an alternative future of computing.

More activity in the sector will always mean greater investor attention, higher trading liquidity and ultimately rising prices. This is one sector to look out for.

References:
(1) Why Second-Tier Sites May Be Worth Top Dollar