Is Investing in Internet-Related Companies a Good Bet?

Damian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On Mar. 10, 2000, a burst bubble provided evidence for the risks associated with investing in Internet-related companies. Many still argue that the bubble bursting was associated with the uncertainty about the value of the service delivered by the companies. Here, three companies with known services and different returns will be assessed: LinkedIn (NYSE: LNKD), Akamai Technologies (NASDAQ: AKAM), and ValueClick  (NASDAQ: VCLK).

A professional networking service

Social networking gave the Internet and financial market a new push. Yahoo! and Facebook made some of the first offered social networking services, though neither targeted the employment market. LinkedIn came into existence to fill that void, by letting users create a professional networking service.  The company today provides hiring and marketing solutions, and premium subscriptions. Hence, LinkedIn created a valuable meeting point for customers. Thanks to its innovative approach to networking, LinkedIn reached an top position within the networking market, making itself a worthy and safe investment all around.

By exploiting a niche within the market, the company has been able to establish the base rules of the game. Such ingenuity has also reflected upon the several ways in which each client develops its own professional network and hedge fund investors. To be more specific, think about how each customer can certify the professional skills of its connections. From now on, potential employers can have a better grasp about future employees’ potential and characteristics. Innovations of the kind have made LinkedIn more valuable to users, giving investors another reason to buy this stock.

The company has also been able to garner a considerable amount of cash, leaving LinkedIn with the opportunity to develop new features and tools to make it even more attractive to users and investors. However, as MorningStar's bears highlight, young companies usually suffer trying to establish a balance between prudent investment and profitability and growth. LinkedIn has so far avoided the mistakes committed by the pre-DotCom-Crisis Internet companies. Hence, it is recommended to BUY since the company looks to be around for a while and has demonstrated responsible management, increasing demand, and continued growth maintaining an impeccable finance record at a reasonable stock price.

More speed means more business

Akamai is another company which offers a real service in the internet while paying good dividends. The company holds many servers around the world to shorten the distance between a potential client and the business wanted to be reached. In other words, the company accelerates internet navigation by deviating traffic from congestion, exploiting available bandwidth, and curbing customer limitations. In an age where market liquidity makes seconds relevant, the speed at which one surfs the web is the determining difference between a placed order and a lost customer. But, in order to provide a faster navigation speed Akamai is obliged to invest heavily in hardware, therefore impacting on operational costs and giving the company a degree of uncertainty upon future prospects.

Looking at Akamai´s financial strength, profitability and growth is pointless. Its economic health is an example to other companies. In MorningStar words, its balance sheet is rock-solid. Hence, the company´s future prospects depend more on savvy management and intelligent investment in order to minimize expected stronger competition. The investment is the easy part since the company has an impeccable financial record. However, given the size of the company´s to-be-competitors, maintaining a leading position will be a hard task. On the up-side, the company has received investment from important hedge funds, providing the necessary liquid solvency to complete the upgrades required to make rivals pay a higher entrance price.

So, as long as the demand for higher surf speeds increases –and demand is expected to rise steadily, Akamai will have a bigger pool from which to pull customers from while increasing revenues. The company has also placed its attention on the security aspect of the business, giving customers more tranquility about shared information. Opportunities also emerge from the mobile communications sector as the use of smartphones becomes common worldwide and their demand for internet navigation increases. Such phenomena will have a positive impact on Akamai´s demand and revenues. Overall, the company enjoys good financial health, and as demand is expected to grow, it is recommended to BUY in order to enjoy the benefits of a well-established growing company.

The business of advertising

Nothing bothers a web-surfer more than advertising. It seems to be everywhere, leaving evidence of the ever-increasing business demand that surrounds ValueClick. Not all is bright and shiny for the advertisement company, however, and analysts have sure taken notice of the company´s foggy horizon by recommending a hold.

According to Zacks, ValueClick is expected to be negatively impacted in its top-line growth and profitability by an unfavorable foreign exchange, sluggish European and US market growth, and stiff competition. In addition to all that, the service that the company provides has been progressively absorbed by its own customers. Such behavior should not be a surprise to anyone since the company licenses its platform to clients. In other words, ValueClick is confronting a significant amount of competition and is losing ground and this is reflected by its stock price decline.

Not all is bad news for ValueClick. The company has shown itself to be a leader among peers, and it has made  some very intelligent and financially-successful acquisitions. At the same time, using the web as an advertisement tool has become ever more common, meaning that ValueClick´s customers can only multiply in number with demand for a more effective service. Also, financial health gives the company a sound sleep since it possesses a mattress on which to fall if its business takes the wrong turn. As a matter of fact, given the company's cash-to-debt ratio, it is fair to say that the mattress is currently under use. In this case it is recommended to SELL as returns are not expected in the short or long term.

Bottom line

Internet based companies have come a long way since March, 2000, and many have learned to provide a remunerated service. ValueClick, Akamai, and LinkedIn are three examples with different results. The first has entered an honest decadence, while the second was able to make a turn around. LinkedIn entered the game having learned from others misfortune and presents today the best prospects for profitable returns, while facing less competition and continually rising competitor´s market entrance price.

This incredible tech stock is growing 2x as fast as Google and Facebook, and more than 3x as fast as Amazon.com and Apple. Watch our jaw-dropping investor alert video today to find out why The Motley Fool's Chief Technology Officer is putting $117,238 of his own money on the table. And why he's so confident this will be a huge winner in 2013 and beyond. Just click here to watch!


 


Damian Illia has no position in any stocks mentioned. The Motley Fool recommends LinkedIn. The Motley Fool owns shares of LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure