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The Internet Industry consists of companies that provide a wide variety of products and services primarily online through their Web sites. Operations include, but are not limited to, search engines, retailers, travel services, as well as dial-up and broadband access services. As product offerings can vary widely within the industry, participants don't all compete with each other.

The industry is not particularly capital intensive, although some participants must continually invest in their operations to remain competitive. Many companies have healthy cash flow, which can be used for capital expenditures, to make acquisitions, and to repurchase shares. The presentation of historical figures, estimates, and projections for Internet companies follows the standard Value Line page format.

Industry Fundamentals

Companies in the Internet Industry operate in a highly competitive environment, subject to rapid technological change. Barriers to entry vary, depending upon the particular markets served. Internet companies operate on the global stage, and results often depend upon the performance of overseas markets and currency exchange rates. Moreover, weakness in the retail economy or lower online advertising expenditures can hinder the performance of many participants. Still, long-term prospects for the industry are fairly encouraging. Trends such as increasing worldwide Internet usage, overseas expansion, and the continued popularity of online advertising ought to further benefit companies in this industry. As a result, many industry participants seem well-positioned in attractive markets.

Revenues

One important measure that potential investors ought to consider when examining Internet companies is revenue growth. The performance of a particular market, along with a company's share of that market, are important drivers of top-line growth. Revenues can also be impacted by such factors as subscriber growth and transaction volume. A strong top-line advance is much more difficult to achieve during periods of economic weakness.

Earnings Per Share

Profitability can vary considerably among industry participants, depending upon the markets they serve and the cost structure of their operations. Recent trends in profit margins can signal investors about a company's operating health, or lack thereof. Return on equity is another important measure that investors ought to consider. Companies with a strong competitive advantage and capable management are more likely to sport wide profit margins and earn high returns on equity.

Share earnings are perhaps the most important driver of stock prices, and industry participants with strong earnings growth over an extended period will most likely experience healthy stock price appreciation during that time frame. Several Internet companies have been active in share repurchases, and it seems likely that buybacks will continue to be a feature of this group.

New Offerings

Given the dynamic nature of the Internet industry, companies must innovate to remain competitive. This can simply mean offering customers new products and services. However, industry participants must also position themselves to benefit from technological developments, and the creation or expansion of markets. For example, in the search engine arena, prospects appear bright in the mobile and video markets. The continued introduction of new applications in these areas appears likely.

Acquisitions and Partnerships

Acquisitions and strategic partnerships are not unusual for companies in the Internet Industry. These moves allow participants to better serve customers and gain market share. The acquisition of a rival can reduce competitive pressure, whereas the purchase of a new technology can allow a company to better serve its own markets and enter new ones. Ideally, these activities allow a company to diversify its revenue stream and will ultimately prove accretive to earnings. Smaller companies may even find themselves the target of an acquisition. In sum, Internet companies will likely continue to make acquisitions and form partnership agreements, though their timing and scope are uncertain.

Restructuring Initiatives

During a challenging economic period, industry participants can engage in a number of measures to improve performance. The divestiture of underperforming, noncore operations is one strategy. A realignment of a company's operations is another. Furthermore, many companies initiate measures to improve their cost structure during difficult times.

Final Thoughts

With solid cash balances and low debt-to-equity ratios, many industry participants sport a healthy capital position. This is especially important during periods of economic distress. The Internet Industry appears to have attractive growth prospects, suggesting that aggressive investors may find some of these stocks attractive. However, conservative accounts may prefer to look elsewhere, given the uncertainty associated with this industry. As a whole, this group carries above-average market risk. Results can vary significantly from one period to the next for some industry participants, and these stocks have below-average scores for Price Stability and Earnings Predictability. Moreover, income-oriented accounts may have little interest here, since few participants pay dividends.

When analyzing a particular company, investors are well advised to consider growth in revenues and share earnings in recent years. Companies with an established track record of sustained profitability are obviously preferable. Timeliness is also an important consideration, especially for momentum investors.