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78% of the Population Uses This Daily

April 20, 2012

Stock of the Day

If you had a product that 78% of the population used for more than 35 hours a week and 61% of those folks admit they were "addicted" to it, you better be making some serious money.

Well, those stats represent Internet usage in the United States and there are a number of companies racking up billions in sales to Internet users.

That's why today we're going to focus on three Internet stocks and the staggering growth in that sector.

So take a seat at your PC, curl up with your laptop, charge up your tablet or tap on your smartphone and start reading the most influential bit of information you'll read online today.

The Biggest Players in the Internet Sector

First up, Google Inc. (GOOG) is a market mover in the technology sector, and it's easy to see why. With almost $38 billion in annual sales, Google is the largest internet search engine in the world and clocks in over 5% of global page views. But, Google is so much more than just a search engine; over the years the company has created a suite of apps and services designed to entice users into entering their information. This information is highly lucrative for advertisers, making it Google's bread and butter.

And this internet powerhouse is only getting started. After a meteoric rise in crafting the world's most-visited internet search engine, Google now has its sights on the consumer electronics market. In 2005, the company purchased the original developer of the Android operating system for mobile devices. In 2008, Google released the first commercial version of the Android software. Currently, Android-based phones make up over half of the smartphone market, dwarfing the iPhone's 29% share and unseating the Blackberry as a smartphone heavyweight. Analysts expect the Android to continue to dominate the market leading into 2012.

Google's most recent earnings announcement was on April 12. The company posted strong operating results for the first quarter, including 26% year-over-year earnings growth and 24% sales growth. Earnings per share weighed in at $10.09, which topped the consensus estimate by 4%. This company is quite strong in terms of sales growth, cash flow and return on equity. However, it still has room for improvement in terms of earnings surprises and earnings revisions, so GOOG earns a C for fundamentals. Nonetheless, buying pressure for GOOG remains quite strong so this is a B-rated stock overall.

Next on my list is Baidu Inc. (BIDU), which is essentially the "Google of China." As the largest Internet search engine in China, its fortunes are closely tied to the emerging market's economic growth. Baidu dominates over four-fifths of the Chinese search engine market, one made up of over 485 million Internet users. But Baidu's just getting warmed up–over two-thirds of the Chinese population still doesn't use the Internet. Baidu is the 6th most-visited website in the world, and I have no doubt that this will improve as more Chinese log on.

Baidu's next earnings announcement is just around the corner–April 24–and I couldn't be more excited. Currently, analysts forecast 82.1% sales growth and 78.7% earnings growth. By comparison, the rest of the Internet Information Providers Industry is only headed towards 11.3% earnings growth. Baidu Inc. has topped analyst estimates for each of the past four quarters, and I expect a similarly strong turnout next Tuesday.

If you plug Baidu into my stock-rating tool, Portfolio Grader, you'll see that this stock gets top marks across several key fundamental metrics–including sales and earnings growth as well as return on equity. Now, Baidu could stand to firm up its operating margin growth, earnings momentum and cash flow, so this company receives a B for its fundamental grade. Meanwhile, buying pressure for this stock remains strong, so BIDU is a B-rated stock.

The last major internet player I'd like to highlight is Yahoo! Inc. (YHOO). In the 1990s and early 2000s, Yahoo! was the darling of the internet industry. Unfortunately, since then the company has had some difficulty adapting to increased competition and lightening-fast upgrades issued by companies like Google. Yahoo! does have a modest presence in the search engine market–accounting for just under 8% of all U.S. internet searches–and roughly 700 million people visit Yahoo websites every month. In addition to a bevy of Yahoo! branded websites, the company is also responsible for photo sharing service Flickr and online publisher Associated Content.

The company reported solid first-quarter operating results on April 17. Compared with the same quarter last year, profits increased 28% to $286.3 million or $0.23 per share. Analysts forecast earnings of $0.17 per share so Yahoo! posted a 35% earnings surprise. Over the same period, sales climbed 1% to $1.22 billion; this also topped the consensus sales estimate.

This was a strong earnings report, but considering the company's fundamental weakness, it can do only so much. Currently, Yahoo scores poorly in my Portfolio Grader tool in terms of sales growth, earnings surprises and analyst earnings revisions. The only pockets of strength are operating margin growth and cash flow. So, this stock earns a C in terms of fundamentals. At the same time, buying pressure is pretty lackluster for YHOO, so this is a C-rated stock overall as well.

GOOG Stock Analysis
Fundamental Garde: C
Sale Growth: B
Operating Margin Growth: D
Earnings Growth: C
Earnings Momentum: B
Earnings Surprises: C
Analyst Earnings Revisions: C
Cash Flow: B
Return on Equity: B
Quantitative Grade: B
Total Grade: B
BIDU Stock Analysis
Fundamental Garde: B
Sale Growth: A
Operating Margin Growth: C
Earnings Growth: A
Earnings Momentum: C
Earnings Surprises: C
Analyst Earnings Revisions: B
Cash Flow: C
Return on Equity: A
Quantitative Grade: B
Total Grade: B
YHOO Stock Analysis
Fundamental Garde: C
Sale Growth: F
Operating Margin Growth: B
Earnings Growth: C
Earnings Momentum: C
Earnings Surprises: D
Analyst Earnings Revisions: D
Cash Flow: B
Return on Equity: C
Quantitative Grade: C
Total Grade: C

Next Week's Lineup

If you liked this week's coverage of earnings season, you're going to love next week's.

On Tuesday, we'll get results from Apple Inc. (AAPL) and I'll be in touch with the latest numbers and company developments.

And, there are no less than 25 big-name companies that will report earnings and we're going to cover them all–from AT&T (T) to Xerox Corp. (XRX).

This is an important Market 360 earnings series that you won't want to miss.

Sincerely,

Louis Navellier

Louis Navellier

P.S. For access to more earnings season winners, try my Blue Chip Growth newsletter. I have 35 stocks primed for earnings season and you can get them risk-free.

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