Internet Stocks Regain the Spotlight

Suddenly, the Internet sector is buzzing with activity again.

After months of investors remaining indifferent to Internet-related companies beyond Google(GOOG Quote - Cramer on GOOG - Stock Picks) mania and eBay(EBAY Quote - Cramer on EBAY - Stock Picks) bashing, Monday brought a few pieces of news that portend interesting times ahead for the sector.

Barry Diller's IAC InterActiveCorp(IACI Quote - Cramer on IACI - Stock Picks) confirmed it was buying search-technology contender Ask Jeeves for $1.85 billion. And arch portal Yahoo!(YHOO Quote - Cramer on YHOO - Stock Picks) announced it would buy social-network and photo-sharing site Flickr for an undisclosed sum that some reports pegged at around $16 million. While varying in size, both deals give some enticing insights on how Internet companies are trying to adapt to a fast-evolving industry.

Right on cue, Piper Jaffray's respected Internet analyst Safa Rashtchy issued a report entitled "It's Time to Buy the Internet Again." Rashtchy argued that advertising and search spending are ahead of expectations while valuations of many Internet properties are 20% to 25% below their levels at the beginning of the year.

"We believe investors should start actively buying the Internet sector again as several fundamental and stock performance factors clearly point to an imminent recovery in the sector," Rashtchy wrote. A key reason is that advertisers who were skeptical of the Internet's potential as a marketing venue have made a fundamental, more trusting shift in their thinking. As a result, many are giving the Internet a bigger slice of their ad-spending pie.

Internet companies are certainly acting as though they agree. IAC will issue 1.2668 shares for every Ask Jeeves share, valuing Ask Jeeves at about $28.24, or 27 times its forecast 2005 earnings and 4.8 times its forecast sales. It's also a $4-a-share premium over the stock's closing price on Friday. Ask Jeeves was trading at $28.04 in Monday trading, signaling that few investors were anticipating a bidding war from other companies in the market for a search engine.

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