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.

 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.