NEW YORK (CNN/Money) -
After Yahoo!'s good, but far from perfect, earnings report on Wednesday, investors seemed to finally realize that Internet bellwethers are pretty pricey. Yahoo!, eBay and Amazon.com all fell sharply on Thursday.
But the stocks still sport extremely high valuations. Amazon.com (AMZN: Research, Estimates) and eBay (EBAY: Research, Estimates) have price-to-earnings ratios of just under 80, based on 2003 earnings estimates. Yahoo!'s (YHOO: Research, Estimates) 2003 P/E is 93.
The three Web titans do have solid growth prospects, but fund managers seeking to capitalize on Wall Street's rediscovered love for Internet stocks are trying to find less expensive companies with equally strong fundamentals.
It's a challenge. There is no such thing as a "cheap" Internet stock (just "cheaper"), and shares in this group tend to trade in tandem. If tech pulls back, shareholders in Internet stocks face big losses.
But if the rally continues, some fund managers think the companies with lower valuations have more room to run than the industry giants.
Here are some of the stocks that are popping up on buy lists now.
Smaller is better?
"A lot of smaller Internet companies have begun to prove their business models and are priced at levels that are more consistent with reasonable growth rates," said Bob Straus, manager of the Icon Information Technology fund.
Two that he owns are J2 Global Communications (JCOM: Research, Estimates) and United Online (UNTD: Research, Estimates). J2, which sells a service that allows businesses and consumers to receive faxes as e-mail documents, has been on a tear this year, gaining nearly 180 percent.
| * as of 7/10/03 | | Source: First Call |
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But even though the stock has outperformed the likes of Amazon.com, eBay and Yahoo!, Straus likes it because it is still much cheaper, trading at 28 times 2003 earnings estimates.
For the next three-to-five years, earnings are expected to increase at a 30 percent clip, the same growth rate as Yahoo! Earnings estimates for 2004 have increased sharply in the past few months following the news that the company was raising its subscription prices.
United Online, created from the merger of formerly free Internet service providers Juno and NetZero, has also done extremely well this year, picking up subscribers for its cheap dial-up service. United offers service at a discount to competitors such as Earthlink and AOL Time Warner, the parent company of CNN/Money.
The stock has soared 75 percent this year but still trades at just 31 times earnings estimates for fiscal 2004 (which ends in June). That's only a slight premium to its expected earnings growth rate of 30 percent for the next few years.
Big growth at lower prices
Michael Mahoney, managing director with EGM Capital, a hedge fund focusing on technology, media and telecom stocks, also thinks that less prominent Internet companies are better bargains.
One of Mahoney's biggest positions is in Chinese Internet firm Sina.com (SINA: Research, Estimates), which along with rivals Netease.com and Sohu, have enjoyed huge runups this year.
Mahoney admits that Sina.com, trading at 46 times 2003 earnings estimates, is not a screaming bargain. But he thinks the stock is worth it since estimates for the year have increased by 78 percent during the past three months following strong first-quarter results and a broader following by Wall Street analysts. For the long term, earnings are expected to grow at a 40 percent clip annually.
Another favorite of Mahoney's is InterActive (IACI: Research, Estimates), which is not as well known as Amazon.com, eBay or Yahoo! despite having a larger market value than Amazon.com and Yahoo!
InterActive, formerly known as USA Interactive, is the acquisitive Internet commerce company controlled by Barry Diller.
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The company owns Ticketmaster, Citysearch, Match.com and Hotels.com and is in the process of acquiring the remainder of Expedia.com that it doesn't already own as well as online financial services company Lending Tree.
The stock isn't exactly dirt cheap, trading at 53 times 2003 earnings estimates. But Mahoney likes it because he thinks it is positioned to grow as rapidly as the other big Net stocks and trades at a lower valuation.
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