Investing in Internet Stocks

Internet stocks are a unique investment choice because the Internet is still growing and has significant room to grow. While many industry stocks have been around for decades, Internet stocks have been around since the 1990's. What's more, as broadband implementation is accelerating throughout the world, more rich and diverse offerings through the Web are being developed internationally. Internet companies like Google and eBay did very well after their initial public offering because they were both differentiated, innovative, quick to acquire market share and equipped with a highly utilizable service.

When investing in Internet stocks, there are several financial metrics one can look for in assessing financial positioning. Since there are many Internet stocks, it is important to look for financial data that distinguishes one company over another. This financial data is invaluable in determining a company's financial stability, growth potential and performance. A few of these metrics are outlined below:

Earnings Per Share (EPS): Earnings per share are what investors commonly look for at each fiscal quarter's 10Q release. In U.S. markets, the 10Q is financial data released to the Securities Exchange Commission every 3 months. The EPS demonstrates how much revenue has been retained for each share outstanding and is a key indicator of a rise or fall in profit margins.

Price Earnings Ratio (P/E): The price earnings ratio is a key indicator of a company's valuation and expected growth. P/E ratios are the price per share divided by annual earnings per share. For example, if Google is valued at $520.00 per share and its annual EPS is $9.86 the P/E ratio is $520.00/9.86=52.73. This means the valuation of the company is around 53 times the EPS value.

Profit Margin: The profit margin ratio is useful because it is demonstrates not only how profitable a company is but also how well it keeps costs down. For example, profit margin on sales is calculated by dividing Net Income by Sales. Since net income is retained earnings after the deduction of operating expenses the higher this percent value is, the lower operating costs are. For example, eBay had an annual net income of approximately 1.1 billion dollars in 2006, its sales were nearly 6 billion, making its profit margin on sales around 18.75%.

Traffic: For many Web sites, traffic and page views per month are key metrics, indicating user interest in the site. Trends in traffic and page views are important to review.

Risks and Potential Rewards:

When investing in Internet stocks there is often some amount of risk which is true for much of the stock market as a whole. Some of these risks are discussed in the following points.

Financial Analysis: When a decision to buy Internet company stocks is arrived at, an investor may not have evaluated all the financial data correctly and/or missed an important piece of information that could really hurt a company financially. This type of mistake could lead one to be ill prepared for a decline of stock price.

Competitor Innovation and/or Contracts: Since the Internet is an evolving industry, innovation is still quite common in the field. When a competitor develops an outstanding innovation that is applied well, this can cause a strong increase in market share and/or revenue thereby potentially hurting that company's competitors.

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Overvaluation: As in the case of the 2000 .com "bubble," stocks can become overvalued. If a company has a strong outlook but an adverse circumstance such as severely restricted financing or shrinking profit margins develop, the stock can decline quickly.

A bright side to the story also exists however, and this is why people invest in Internet stocks. That is to say, just as there are risks associated with investing in Internet stocks, there are also potential rewards. Two potential rewards in relation to stock price are as follows:

Earnings Growth: An increase in earnings above analysts estimates is often looked upon favorably by investors. A strong quarterly earnings report can be a positive influence on a company's stock price. Internet companies have the potential for significant earnings growth.

Corporate Guidance: Forecasted financial statistics that are positive, bigger and better than previous fiscal quarters is another piece of news investors usually like. Such financial news is a signal from corporate leaders to investors that they believe the company has favorable prospects going into the future.

Internet stock investing is sector investing in an area that is still growing rapidly. For this reason, and those mentioned above, Internet investing may be worth considering when investing in the stock market.

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