A:

The main reasons for investing in the Internet sector are the higher-than-average earnings growth, profit margins and return on equity (ROE) offered by some Internet companies. These factors have led to higher-than-average returns for some Internet investors. When the Internet first became available to businesses in the mid-1990s, entrepreneurs and investors rushed to register websites and think up new and innovative businesses. While the vast majority of early Internet companies fizzled, some, such as Google, eBay, Yahoo and Amazon, have become household names.

Even though many early Internet companies flopped in the wake of the dot-com bubble, the underlying premise behind many of them was to make goods and services available to consumers that would not have been available otherwise or at a lower price than could be previously offered. Where in the past, a product might have required years of careful marketing, including television advertising and reviews in print media, the Internet suddenly allowed a new product or service to be made available to consumers almost overnight.

The most successful Internet companies have found ways to leverage core businesses to generate other revenue streams. Google's core search business has allowed it to create entirely new industries, such as keyword-based advertising and search analytics. Likewise, Amazon was a book retailer, but like Walmart before it, its sales and distribution channels, as well as its prices, filled a huge market gap. Customers today flock to Amazon for all types of merchandise. Google has annual revenues of $66.00 billion and Amazon's are $88.99 billion.

The way in which the Internet makes a worldwide clientele immediately available has allowed other innovative companies to bring revolutionary products and services to market.

Netflix was one of the few Internet companies able to muster a market in which to sell common stock in 2002, in the wake of the dot-com bubble and subsequent crash. As of Feb. 24, 2015, its shares have returned about 6,200% since the initial public offering (IPO). Netflix has $5.50 billion in annual revenues reported quarterly earnings growth of 72.20% on a year-over-year basis for its 2014 fourth quarter.

Facebook was founded in 2004 and first offered stock in 2012. Since its IPO, Facebook shares have returned 105.21%. The social networking giant has gross annual sales of $12.47 billion and an operating margin of 39.97%. Over the past five years, Facebook has had annual earnings per share (EPS) average growth of 91.81%. Consensus estimates from analysts for annual EPS growth for the coming five years are 32.42%.

Founded in 2006, Twitter offered stock in an IPO in November 2013. Since the IPO, the shares have returned 16.90%. For the coming two years Wall Street analysts are calling for EPS growth of 171.40% and 113.20%. With Twitter's gross annual revenues of $1.40 billion, analysts expect a profit from Twitter for fiscal 2015 and 2016.

Even though it was founded in 1999, and didn't go public until 2014, Alibaba is an Internet giant with a market capitalization of $210.65 billion. Alibaba has $11.33 billion in annual revenues, an ROE of 29.54% and a profit margin of 38.09%.

Other market leaders in the Internet sector with strong sales and earnings growth include Vipshop Holdings, GrubHub, Bitauto, Stamps.com and MercadoLibre.

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