A leader to consider
This internet giant most recently made it to the top of the list in most major investment websites. As a leading provider of web-based services and advertisements, its incursion into the mobile business looks promising and provides plenty of catalysts for growth. Despite stiff competition from Google Inc (NASDAQ:GOOG), and somewhat disappointing Q1 results, Yahoo! Inc. (NASDAQ:YHOO) provides an encouraging outlook for potential investors. Most analysts, like me, are ranking this company as a strong buy. Here are several other reasons to believe in its future performance:
Several efforts have and are expected to continue to increase the firm’s market share in the mobile sector. By widening its user base, Yahoo! Inc. (NASDAQ:YHOO) can start benefiting from material mobile advertising, like Google Inc (NASDAQ:GOOG) and Facebook.
The company’s Asian assets are gaining value. On one hand, Yahoo! Japan shares were recently up, just like Yahoo!’s participation in this company. On the other hand, its share in the leading Chinese Internet company Alibaba, which grows at outstanding rates, is expected to generate considerable returns, doubling its value over the next two or three years. Some analysts believe that Alibaba could repurchase stock from Yahoo! Inc. (NASDAQ:YHOO), infusing a considerable amount of cash into the American company.
The online advertising market is one of the hottest growth segments at the moment and Yahoo! is one of the main players. As this sector is expected to grow by over 23% during 2013 and continue with double-digit expansion over the following two years, the firm will most likely benefit from it.
Despite several variations in its composition, management has smartly focused on the core businesses — email, search, and social networking segments — which have become central to the firm’s strength, and in the maximization of profit. Efforts to increase this focus have been taking place recently as non-core assets, like Yahoo! Inc. (NASDAQ:YHOO) HotJobs and Zimbra email, are disposed (actually, sold, of course), thus widening operating margins.
Due to the company’s strong balance sheet, pursuing opportunistic acquisitions is not only possible but, usually, profitable, “particularly if there is a downturn in valuations of venture-backed companies needing an exit.” (Morningstar).
In terms of valuation, Yahoo! Inc. (NASDAQ:YHOO) trades surprisingly cheap. At a P/E ratio of 7.6, it trades considerably below the 50.3x industry average.
A company with great potential
Also delivering online services worldwide, analysts expect Akamai Technologies, Inc. (NASDAQ:AKAM) to witness considerable growth in the near future. As stated by Zacks’ analysts, “the company’s superior content delivery platform and its ability to provide high-quality service at a much lower rate compared to its peers will boost its market share.” Moreover, no other start-up has had the success in providing content delivery network services that this company exhibited.
As the company offers solutions to cope with bandwidth limitations and Internet traffic in general, without the need for additional hardware, the growing demand of heavy content, principally high definition media, will most probably drive the demand for the firm’s products in the future. Furthermore, the growth of data traffic in the mobile segment will most certainly contribute to Akamai Technologies, Inc. (NASDAQ:AKAM)´s growth as well. Given that mobile video streaming and download is expected to account for 56% of total traffic by 2018, plenty of opportunities should open for the company as its product offering caters the needs of this sector.
In addition, the boom in cloud computing will certainly add to the firm’s long-term growth as demand is expected to increase by 60% to 80% within the next five years. While currently contributing with 60% of its revenue (and its nature is considerably recurring), this segment should help the firm reach its annual revenue target of $5 billion by 2020, about four times the current $1.37 billion.
Finally, partnerships with huge companies like AT&T, Orange, and KT are expected to expand its already wide customer base (which had been previously extended by other acquisitions including Cotendo, Blaze, Fast Soft, and Verivue). Plenty of other reasons to buy this company’s stock, like its strong cash balance, can be listed. However, the aforementioned are probably the main ones. While currently trading at 40.5 times earnings, it could still be considered a value stock, since the industry mean is at 54.1 and, especially, the forward P/E of 21.4 reveals a substantial projected growth rate (Morningstar).
A valuable stock
Despite some downgrades in rating, I would still recommend buying Facebook Inc (NASDAQ:FB). You might wonder why, given that it trades at an extremely expensive 625 P/E ratio. The answer comes easily: look at the forward P/E ratio of 38.9. You should notice that the company is expecting outstanding growth over the next year or so. Investors have proved that they enormously trust this company too, leading the stock to its current valuation. In case these figures do not fully convince you, below you will find some other reasons to believe that Facebook Inc (NASDAQ:FB) will outperform its peers, and is therefore, worth investing in even at such high multiples:
Facebook Inc (NASDAQ:FB) holds a massive user base and therefore, it has the opportunity to capitalize on it though diverse advertising methods. Global online advertising is expected to increase 14% during 2013 and this should help the company’s prospects going forward.
Although it took the firm a while to launch mobile advertising products, it now dominates this area as well. Expected mobile revenue is $1.5 billion for 2013 (Morningstar), which represents about 30% of 2012´s total revenue.
Advantage in advertising is not only provided by the amount of people entering Facebook Inc (NASDAQ:FB) daily, but also by the time spent on the page. The website retains surfers longer than any other known one; the average user spends about seven hours (actually about 6 hours and 40 minutes, to be precise) on this site each month. This figure at least triples the values offered by other top 10 web brands.
Its scale and loyal customer base have attracted app developers in the past and will most likely continue to do so. As a result, monetization figures for these apps should increase, both through ads and the sale of virtual products in social gaming apps.
Facebook Inc (NASDAQ:FB)´s acquisition strategy has proven profitable in the past and it will most probably drive its income in the future as well, as strategic purchases further widen its product offering.
Bottom line
Although all of these internet services companies offer great growth prospects, I would put my money down in Yahoo! Inc. (NASDAQ:YHOO) right now. Trading substantially cheaper than most its competitors while presenting plenty of upside, this is a value stock. Buy now before its impending success is priced in.
The article 3 Big Stocks in the Internet Industry originally appeared on Fool.com and is written by Victor Selva.
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