No Bust in Internet Stock Boom

Internet stalwarts show no signs of slowing down in 2008.
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The Internet sector will step into 2008 with a tail wind, thanks to continued strong growth in online ad spending.

But competition should accelerate as a growing number of players vie for for a share of ad dollars. In the process, the fate of individual companies will be increasingly tied to their own technology and maneuvering. The sector as a whole will not be as important to each company.

Investors should expect brutal turf wars as the flood of ad dollars shifts online.

In contrast to traditional forms of advertising -- where fears of a recession have many analysts predicting a pullback -- the forecasts for online advertising continue to be robust.

Research firm eMarketer predicts that online ad spending will grow 29% in 2008 to $27.5 billion in the U.S. alone. Paid search ads and display ads will account for about 40% and 21.5% of the spending, respectively.

Generally, Internet stalwarts

Google

(GOOG) - Get Report

and

Yahoo!

(YHOO)

have dominated this market.

Google has been the leader in paid search, and Yahoo! has headed the ranks by far in display advertising. In 2008, however, the lines between Google and Yahoo! will blur -- and everybody from

eBay

(EBAY) - Get Report

to a newly structured

IAC/InterActive

(IACI)

will make aggressive bids for ad dollars.

Yahoo!

No company is more threatened by the online world's emerging new order than Yahoo!.

For starters, Google is seeking to become an overnight player in Yahoo!'s display ad market through its pending acquisition of ad serving firm DoubleClick. Google sought to buy DoubleClick in April and is waiting for regulatory approval.

If the deal clears in early 2008 -- as many market observers expect it to -- Yahoo! will have to contend with a new, powerful entrant into a market it had long considered its own.

But Yahoo! should also worry about

Microsoft

(MSFT) - Get Report

, which boosted its own efforts in the display market through its purchase of online ad company aQuantive in May.

In many ways, it's been a tough year for Yahoo!. The company has had to fend off two powerful competitors bent on encroaching on its bread-and-butter business.

In 2007, founder Jerry Yang took the CEO position at Yahoo! after the abrupt departure of Terry Semel. Yang has announced an ambitious plan to turn the company around, but that leaves a lot of balls in the air for Yahoo!

Despite bouts of euphoria -- shares surged more than 30% during the year -- Wall Street remains skeptical about Yahoo!. Shares are off more than 6% year to date.

Still, Yahoo!'s shares trade at almost 45 times forward earnings and command a price-to-earnings-to-growth ratio (PEG) of 2.3. Investors expect heady growth from the company. In 2008, Yang will have to show them how he plans to deliver.

Google

Google hopes to extend its winning ways in 2008. While the search giant's competitors seem unable to stop it -- its share of the search market is up to 65% as of October, according to research firm HitWise -- investors will be wise to mull the scope of the company's ambitions.

In November alone, the company announced it would bid the minimum $4.6 billion required to participate in the FCC's upcoming auction for wireless spectrum as well as try to discover a form of energy more efficient than coal.

The company has also announced a new mobile operating system, called Android. During the summer, it pioneered a new video advertising system for its YouTube video sharing service.

These initiatives are on top of Google's existing projects to enter radio, satellite TV, print, and display advertising. And if history is any indication, 2008 will likely bring plenty of bold new directions as well.

Investors have come to expect a lot from Google. Shares gained 50% during 2007 and currently trade at $700.74. But the median price target for the stock is $750, indicating that most Wall Street analysts expect further increases. And with a PEG of 1.3, the company will have to grow earnings 35% a year for the next five years to live up to those expectations.

eBay

eBay's auction business dominated headlines in 2007. But expect new stars, including its PayPal payment business and growing online advertising business, to shine brightly in 2008.

For now, shares of eBay will enter the new year up about 10% -- on par with the broader Nasdaq index. The stock had been soaring, up almost 35% as recently as October, until concerns surfaced that user growth and activity at the company's auction business were slowing following the company's third-quarter earnings results.

While eBay struggles to boost activity in auctions, it will try to find new opportunities for fast growth in 2008. To that end, it launched the Kijiji, an online classified site, in the U.S. in 2007.

Kijiji is an attempt by the company to expand into the growing online ad market. Growth at PayPal also continues at a blistering pace, and as revenue from the service continues to grow, eBay will attempt to take advantage by adding more features to the service.

Trading at about 20 times forward earnings with a PEG of 1.23, some eBay boosters argue that the company should be considered a value stock by Internet standards.

Amazon

It's tough to imagine

Amazon

(AMZN) - Get Report

repeating its 2007 performance in 2008. Shares of the Web retailer gained about 130% during the year, making it the best performing major U.S. Internet stock by a wide margin.

Shares were driven higher after the company delivered second-quarter results and said that it would pull back the reins on its investments, a move analysts expect will help boost the company's closely watched operating margins.

Still, 2008 promises to bring some of the company's more high-profile products further into the spotlight. In November, Amazon launched Kindle, a digital book reader with a broadband connection.

In addition, early 2008 should bring holiday sales results. And the company's push into computing services through its EC2 and S3 services -- which sell computing and storage to business -- is expected to get even more traction in the year ahead.

Trading at 55 times forward earnings and with a PEG of 3.5, it's tough to make the case that now is the time for investors to get into the stock.

IAC/InterActive

Come 2008, IAC will no longer be the far-flung conglomerate investors long knew it as. In November, the company announced that it would split into five different new entities, with the parent companies retaining the group's Internet businesses. This includes high-profile brands like the Ask.com search engine, the Citysearch local listings directory, and the Evite event planning service.

The move signals that IAC intends to align its fortunes with what it sees as growing opportunities in the booming online ad market. Of course, other players see that opportunity as well -- and IAC should prepare for plenty of competition there.

Shares currently trade at about 15 times forward earnings. That reflects the weight of IAC's slower-growth businesses, such as the Home Shopping Network, which accounts for about half of its revenue. The company's PEG is 1.26.