Extraordinary Highs in This Sector

As many of you who have read my columns are aware, I view the Internet sector as an excellent long-term growth vehicle. Unlike brick and mortar businesses, the Internet is constantly fresh and full of changes. I believe the trend in Internet spending will continue to accelerate going forward.

 Come up with a unique Internet business concept, and you too  can be rich. Just ask Larry Page and Sergey Brin, the co- founders of Internet sensation Google Inc. (NASDAQ/GOOG). They have taken the stock to extraordinary heights with a current market-cap in excess of $81 billion. But trading at 39.84x its FY06 EPS and a PEG of 1.72, there are some investors that are questioning the valuation. And, while the valuation is not cheap, I do not think it is excessive either. As long as Internet advertising continues, Google will continue to report awesome growth.

 Last week, another Internet bellwether stock, Amazon.com (NASDAQ/AMZN), surged 21% to a new 52-week high after it reported a strong second quarter in which year-over-year sales growth was 26% to $1.75 billion, beating Wall Street by a small margin. Year-over-year pre-tax earnings came in at $108 million, up from $81 million in the prior year. The results helped drive up the share price of Amazon. And while this is an excellent long-term company with an impressive business model, I have to question the valuation that the market has assigned to Amazon versus that of its peer group.

 Take Google for instance. Google trades at 39.84x its FY06 EPS and a PEG of 1.72. Amazon, in comparison, trades at a more expensive 47.29x its FY06 and a PEG that is expensive at 3.13. Even eBay Inc. (NASDAQ/EBAY) and Yahoo! Inc. (NASDAQ/YHOO) are cheaper at 42.09x and 45.16x their respective FY06 and a cheaper PEG of 1.80 and 1.95, respectively.

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 Now, this is not to say that Amazon should be avoided, but you really need to compare the relative valuations. My personal opinion is that there are more attractive large-cap Internet stocks to put your capital in than Amazon. If you bought Amazon near the 52-week low, you may want to take some profits and rotate into the more attractively valued Internet stocks. The stock may be ahead of itself.