The Best Way to Invest in… the Internet?: Yahoo! Inc. (YHOO), eBay Inc (EBAY)

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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.

Yahoo! Inc. (NASDAQ:YHOO)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:GOOG) 1 billion
2 Facebook (NASDAQ:FB) 1 billion
3 YouTube 824 million
4 Yahoo! Inc.  (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 (NYSE:LNKD) 84 million
15 Yahoo! Japan 84 million
16 Bing* 97 million
17 MSN* 105 million
18 Google Japan 72 million
19 eBay, Inc (NASDAQ:EBAY) 69 million
20 Yandex 67 million

Sources: World Bank and *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 Corporation (NASDAQ:MSFT) 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,, 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:

1). Google is by far the biggest of the four.

2). Yahoo! has somehow been able to increase profitability while losing revenue.

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