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.

  1. What portion of the global economy is represented by the Internet sector?

    Find out the size of the global Internet sector, how much of the global economy it represents and what businesses are included ... Read Answer >>
  2. What are the main benchmarks that track the performance of the Internet sector?

    Learn about the main benchmarks that track the performance of the Internet sector. The Internet sector is one of the fastest-growing, ... Read Answer >>
  3. How much of the profitability in the Internet sector is concentrated in the few major ...

    See how much profitability of the Internet sector is concentrated, and where the most value from Internet-based services ... Read Answer >>
  4. Why is the price to sales ratio commonly used for comparing companies in the Internet ...

    Find out why Internet stocks are valued, traded and compared to each other based on the price to sales ratio versus other ... Read Answer >>
  5. What is the internet sector?

    Learn what products and services comprise the Internet sector and some of the key companies that shape it. Also what part ... Read Answer >>
  6. How has investing in the Internet sector evolved over time?

    Learn how early investors of the Internet sector received a valuable lesson and influenced modern-day markets after the dot-come ... Read Answer >>
Related Articles
  1. Investing

    How To Value An Internet Stock

    An academic study, published several years after the peak of the dot-com bubble in March 2000, accurately described just how whacky internet valuations grew until the bubble burst. The study's ...
  2. Investing

    How The Internet Has Changed Investing

    Discover the significant impact the Internet has had on how we invest and view the markets.
  3. Taxes

    Pros and Cons of an Internet Sales Tax

    Learn about the pros and cons of a nationwide Internet sales tax and the different bills that have been proposed to establish laws regarding Internet sales.
  4. Taxes

    Revisiting the Internet Sales Tax Bill: 2013 Vs. 2015

    Learn about the Marketplace Fairness Act of 2015 being reviewed by congress and the differences between it and the 2013 Marketplace Fairness Act.
  5. Personal Finance

    World's Top 10 Internet Companies

    Investopedia has compiled a list of the top 10 Internet companies in the world based on revenue and market cap.
  6. Retirement

    Is Facebook Stock Suitable for Your IRA or Roth IRA? (FB)

    Learn about Facebook's long-term outlook and relative valuation, and find out whether it is better suited for a Traditional IRA or a Roth IRA.
  7. Trading

    Is Google Becoming A Monopoly?

    Learn about whether Google is becoming a monopoly. Monopolies are considered undesirable because they prevent competition and innovation.
  8. Investing

    Are Facebook, Amazon and Alphabet Unstoppable? (AMZN, FB)

    Facebook, Alphabet and Amazon all closed at all-time highs on Wednesday. Is this irrational exuberance, or are we witnessing a major shift?
  1. Consumer Internet Barometer

    A quarterly survey report produced by the Conference Board and ...
  2. Internet Bubble

    A rapid rise in equity markets caused by speculation into online-based ...
  3. Internet of Things (IoT)

    The Internet of Things (IoT) is a network comprised of physical ...
  4. ISP (Internet Service Provider)

    An ISP, or internet service provider, is a company that provides ...
  5. Web 2.0

    A term used to describe companies, applications and services ...
  6. Technology Sector

    The technology sector is a category of stocks relating to the ...
Hot Definitions
  1. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  2. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  3. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  4. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  5. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center