3 Popular Internet Stocks To Buy Now, 1 To Avoid

by: Cris Frangold

It is far easier to imagine an effective web based retailing or service operation than it is to create and operate such a thing. I am going to look today at some of the leaders in internet commerce.

Amazon (NASDAQ:AMZN) is the uncontested leading online retailer. It operates auctions, fixed price sales, and unlike most internet retailers, even has a well-known manufactured product, its Kindle line of e-readers. Amazon stock is trading at an all-time high as I write this at about $258 per share.

Amazon's financial performance this year has been poor, and there is no reason for optimism in the near term looking forward either. A combination of sustained high expenses due to technology investments, along with costs pertaining to Amazon's purchase of Kiva, a leading maker of robotic order fulfillment equipment, led to a poor bottom line. As a result, second quarter earnings fell by 96% from the second quarter of 2011, to $7 million, or one penny per share. This was despite revenue increasing by 29% from the year ago quarter, to $12.8 billion.

Making matters worse, management has issued guidance that it expected an operating third quarter loss of from $50 million to $350 million. Revenue, which analysts had previously figured to be at about $14.17 billion in the third quarter, management projected to be from $12.9 to $14.3 billion.

There will probably come a day when the sharp revenue increases and the technology investments will start to pay off. But Amazon is about as mature a company as there is in the world of internet retailing, and yet it is priced like some of high flying start up with a PEG of over 9. If being a value investor is a part of your philosophy, look elsewhere.

eBay (NASDAQ:EBAY) is thought of as the world's largest garage sale, mixing fixed price and action sales from third party suppliers. It also has a substantial financial arm in the PayPal unit that it acquired in 2002. It is consistently profitable, with double digit margins to boot. So pervasive is eBay in our culture that sometimes items are bought and sold on the site before they are on the retail market.

Unlike Amazon, eBay posted stellar second quarter results. Revenue increased 23% year over year to $3.4 billion. GAAP profits came to $692 million, and adjusted income to $730 million, or $0.56 per share, a 16% advance from the second quarter of 2011. All three of eBay's units, marketplaces, PayPal, and GSI reported sharp growth. What is more, earnings growth at eBay appears to be on the upswing. I see 2012 earnings at about $2.40 per share, nearly a 20% advance from 2011. With its clean balance sheet and reasonable PEG of 1.6, eBay is a reasonable choice for a long-term investor.

Priceline (NASDAQ:PCLN) is an internet based travel agency with both fixed price and "name your price" options. The issue has been under some pressure in recent months, largely due to a discrepancy as to tabulate hotel room units in Europe.

After topping out at about $775 per share back in the spring, the stock price has settled back down to about $560 per share in August, since rebounding to the $640 per share price it is as I write this. Maybe more interesting, "the Negotiator", William Shatner, has returned to the airwaves.

Priceline has substantial European hotel relationships. As the European Union block recovers, as it must do at some point, Priceline is leveraged to succeed. The company is fairly valued with a 5 year PEG of 0.98. I think of Priceline as a fine choice for patient investors who want to take advantage of this stock being among the ones not currently at its 52-week high.

A big internet service company to have had a highly successful initial public offering is LinkedIn (LNKD), which was first priced at $45 per share, and then doubled on its first day of trading back on May 19, 2011. Since then, it has advanced further, to the over $120 per share it trades at as I write this. LinkedIn is a leading professional social networking site, and is the only internet social site launched in the last 18 months to have rewarded initial investors. Jeffries (JEF) analysts, noting tremendous recent and future revenue growth, have pegged a goal of $142 for the stock price.

LinkedIn has become the world's largest online "rolodex" and a key element in employers and employees finding one another. As such, the struggling employment situation, much of which being caused by a mismatch between employer needs and employee qualifications, can effectively be somewhat solved by this site.

On the profit side, LinkedIn is forecast to nearly double its profits this year at $0.62 per share versus last year's $0.35 per share. From there, the company is projected to achieve 5 year growth averaging 58%. From a value perspective, well, this is not even close. But if you can be patient enough to enjoy the growth that is likely from this company now selling at an astronomical valuation and a 5 year PEG of 3.45, step on up.

What each of these companies have is two main features: An attractive product or service, and an easy to use, visually appealing website. For these and all internet retailers, their websites are just as important as display cases are at a clothing store. For younger companies especially, creating a visually appealing internet presence is key. As with all needs, there are a host of solutions. One major player is templatemonster.com, where the user can customize all aspects of a template, including colors, logos, types of business, etc., to create a professional appearing site. Having a website that stands out visually is a key element in achieving market share from established companies.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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