Can the Worst Internet Stocks of 2010 Rebound in 2011?

2010 was a pretty kind year to stock investors, with the S&P showing a 12.8% gain. However, the current year has started out at an even more torrid pace; the S&P has shot up 6.8% in less than two months.

Still, not every stock sees gains when a rising tide lifts all boats. Here's a list of last year's worst performers in the Internet software and services industry, which ignores companies that have gone bankrupt or sunk below $200 million in market capitalization. After reviewing what went wrong last year, we'll take a look ahead to see which stocks are rebounding in 2011.

Source: Capital IQ, a division of Standard & Poor's. Only includes companies listed on U.S. exchanges that contain a market capitalization greater than $200 million.

When you're a stock darling in the Internet space, that's often accompanied by steep price multiples and high growth expectations. That can also mean any sign of weakness can hit share prices hard.

Two great examples of this are Vistaprint and Equinix. Both companies were absolutely pounded last year after earnings reports that didn't quite satisfy investors. Vistaprint's earnings release at the end of July sent its shares down over 38% in a single day. Equinix's day which will live in infamy came in early October, when its shares fell 33% in a single day. In Equinix's case, the 33% haircut came thanks to reducing its full year guidance by a mere 1.2%.

Also staking a space on the list were search giants Google and Yahoo!. While Yahoo! has continued struggling to find an "identity" in its hodge-podge of valuable online properties and has had stagnant revenues since 2006, Google continues to be a strong grower. Last year, the Big Goo boosted sales by 24%, and net income leapt even higher. Their presence likely highlights investor fears of online users moving away from traditional search engines and portals and onto new platforms like Facebook.

So, which of these stocks is making a rebound in 2011? NetEase has rebounded the most strongly of the bunch, already posting an impressive 23% return in 2011. Even though NetEase doesn't report earnings until Wednesday, bullish analyst sentiment has sent the stock up soaring in recent weeks.

On the losing end, GSI Commerce and InfoSpace have continued to underperform the market. GSI Commerce presents one of the more interesting stories in the Internet and services space. While the company is most famous for building software that enables retailers to establish online stores, it also has a toe-hold in the booming "fashion flash-sale" niche thanks to its 2009 purchase of Rue La La. The category of sites is gaining widespread investor attention after reports surfaced that Rue La La's main competitor Gilt Groupe was able to raise a round of funding at a $1 billion valuation.

However, while Gilt Groupe's valuation might turn heads, GSI was forced to take an $88 million impairment related to its Rue La La acquisition in its fourth-quarter results. While deal sites might be seeing booming sales, their ability to turn a profit is far from assured.

Finally, while the fast-moving Internet space isn't known for being a bargain-priced haven for value investors, several underperformers from last year present unique value opportunities. InfoSpace might be a company better remembered for its dot-com glory days, but it presently trades for an enterprise value of only $47 million despite generating free cash flow of $43 million last year. Likewise, while ModusLink's earnings look abysmal, the company actually generated $15 million in free cash flow last year and has a cash balance equal to about half its market capitalization.

Then there's Yahoo!. While there are plenty of business pitfalls ahead, Yahoo!'s large stake in valuable Asian online properties like Yahoo! Japan and Alibaba is widely believed to constitute up to half the company's total value. While that presents a potential value situation for the company, it can also steer Yahoo!'s stock in the wrong direction regardless of how well the parent company is operating. For example, recent fraud allegations at Alibaba could put an anchor on Yahoo!'s own share price growth.

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