The Best Way to Invest in... the Internet?

There's no such thing as a sure bet in the investment world. The best we can do as investors is consider all of the facts available to us, meditate on those facts, consider possible futures, and then read ourselves to see if we are comfortable buying a piece of a certain company or not.

For myself, one trend that I am comfortable investing in right now is the Internet. Just 20 years ago, if I needed a recipe for something, I had to find it in a cookbook; if I had to write a paper, it probably involved long hours at the library.

I don't need to belabor how much the Internet changed the way we do certain things. Instead, I want to focus on what enabled me to find that recipe and that information for my paper so much faster: search engines.

Without a doubt, search engines are some of the most popular websites out there. Take a look at top 20 sites in the world, and you'll see what I mean.

Rank 

Website

Unique Visitors per Day 

1

Google (NASDAQ: GOOGL  )

1 billion 

2

Facebook

1 billion 

3

YouTube

824 million 

4

Yahoo! (NASDAQ: YHOO  )

462 million 

5

Baidu (NASDAQ: BIDU  )

292 million 

6

Wikipedia*

311 million 

7

Windows Live

205 million 

8

Amazon 

168 million 

9

QQ*

183 million 

10

Twitter

142 million 

11

Blogspot*

153 million 

12

Google India

111 million 

13

Taobao

106 million 

14

LinkedIn

84 million 

15

Yahoo! Japan

84 million 

16

Bing*

97 million 

17

MSN*

105 million 

18

Google Japan

72 million 

19

eBay 

69 million 

20

Yandex (NASDAQ: YNDX  )

67 million 

Sources: World Bank and alexa.com. *Sites are ranked by number of total unique visitors and pageviews over one month. The list provides the number of unique visitors on Feb. 19, 2013. Thus, though Wikipedia, QQ, Blogspot, Bing, and MSN have more total visits, they are ranked lower due to the total number of unique visits.

I believe that investing in search engines -- and the cash they produce through advertisers -- is a pretty solid bet.  This is especially true when you consider that well over half of the world's population still doesn't have regular access to the Internet.

Of these 20, I would say that four of them are as close to pure search plays as you can get: Google, Yahoo!, Baidu, and Yandex. Though Microsoft has a hand in a number of companies mentioned above, and Bing is its primary search engine, the company is fundamentally different than the others.

So the question is: Of these four, which is should you buy?

First, let's just look at the numbers
There are many ways to approach this question, so I'm going to start with the most direct form possible: simply crunching the valuation numbers.

Metric 

Google

Yahoo!

Baidu

Yandex

Market cap

$263 billion

$25 billion

$32 billion

$8 billion

3-year average revenue growth

28.5%

(10%)

78%

53%*

3-year average EPS growth 

16.5%

84%

97%

45%*

P/E

25

6.5

19

32

P/FCF

20

16

19 

31 

PEG Ratio

1.3

1.5

0.6

0.7

Sources: Yahoo! Finance, Fool.com, SEC filings. *One-year results due to only being a public company since 2011.

One look at this list points out several important distinctions between these companies. Among the most important:

  • Google is by far the biggest of the four.
  • Yahoo! has somehow been able to increase profitability while losing revenue.
  • Baidu and Yandex look to be undervalued by traditional metrics.

Before going any further, though, I want to get back to my question: Which company should you buy? In reality, I'm asking the wrong question. The first one should be: What are you looking for in an investment?

After that, answering which you should buy becomes much easier. So below, I've summarized which are good buys for certain investors.

Google
This is the perfect stock for any investor looking for a safe, familiar stock that has a good chance of appreciating in value over the next decade. Lead by co-founder and visionary Larry Page, Google has its hands in several sticky businesses that win over customers for life outside of search alone: YouTube, Gmail, Chrome, and Android, to name a few.

It should be noted, however, that Google's stock may not rise in price as much as the other players here. It is far more well entrenched and its home markets more saturated. And if Larry Page leaves any time soon, or if the company starts losing money on mobile searches, then it may be time to reevaluate your investment thesis in Google.

Yahoo!
As I stated above, Yahoo! is an interesting case study. Though revenue has fallen, earnings have accelerated over the past couple of years. That's because the company has been cutting costs and focusing more on its profitable divisions.

While Yahoo! isn't much of a force anymore in the United States -- Bing actually provides search results domestically -- it is still a major player overseas. It is among the top 10 most-visited sites in countries like Brazil, Argentina, the Philippines, India, and Pakistan.

With new management in place that investors can finally believe in, the stock is perfect for someone looking for a turnaround investment. That means returns over the next couple of years could be huge... or negative, depending on if management can capitalize on Yahoo!'s international popularity.

Baidu and Yandex
Finally, we have Baidu and Yandex. If you're looking for companies with an established presence in their home markets -- China and Russia, respectively -- with a little more risk involved than Google, these are perfect stocks.

It should be noted that one of the reasons these companies are undervalued is because they are going through the same spending and investment cycle that Google began a couple of years ago. An investment in either company is both an investment in their home countries, a vote of confidence in the truth behind their accounting numbers, and in their respective ability to make mobile profitable.

Given each company's size, there's still a lot of room for growth. Baidu is tempting because the population of China is so huge, and the Internet penetration still relatively small. And while Yandex certainly has a smaller base to work with, it is also a top 10 website in four populous former Soviet bloc countries.

So there you have it. Google is great for the safe investor, Yahoo! is prime for someone looking for a turnaround, while Yandex and Baidu are international plays that carry a higher risk/reward proposition.

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