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5 ways to profit from the Internet

A new report by marketing agency ZenithOptimedia forecasts Internet advertising expenditures to overtake newspapers for the first time in 2013, and then exceed the combined total of newspaper and magazine advertising expenditure in 2015.

That’s a paradigm shift. The fastest-growing segment of Internet advertising is mobile, with smartphones and tablets becoming common currency, and mobile advertising expenditure is forecast to grow 67% in 2013. Contrast that with print, forecast to shrink an average 2-3% a year between 2012-15.

Here are some digital businesses perfectly leveraged to take advantage of the forthcoming advertising bonanza. Three are among Australia’s top 200 companies already, having grown rapidly, they’re established favourites, primed for future success. The two others may just be tomorrow’s multibillion-dollar success stories. A brave investor’s ticket to riches.

Jobs website Seek (ASX: SEK) is trying to replicate its raging success at home by investing in online operations across southeast Asia, China, Brazil and Mexico. At home it simply dominates the competition.

Offering unrivalled reach to advertisers, its website has recorded more than 13 million visits a month, with an additional 2.1 million mobile visits recorded a month. It estimates it has three times the number of job opportunities advertised than its nearest competitor. The company grew profits 8% to $141million for financial year 2013.

Automobile website Carsales.com (ASX: CRZ) is another outstanding performer that continues to grow website and mobile traffic. Buyers, sellers and paying advertisers naturally gravitate towards the website with the most tradable vehicles. In turn this compounds both popularity and profits. The competitive advantage, or economic moat, becomes increasingly hard for rivals to break. For financial year 2013 net profit was up 17% to $83.5 million.

Carsales recently acquired a 19.9% equity interest in iCar Asia (ASX: ICQ). It’s an operator of automotive websites in Malaysia, Indonesia and Thailand. For the six months to June 30 the company posted a loss of more than $2.7 million, with revenues of just over $0.5 million.

Nonetheless, the share price has skyrocketed over 300% in the past year. The prospect of Carsales.com taking over iCar Asia is seemingly on investors’ minds. Also, as the middle classes develop, growing car and Internet use in Asia is a given. However, the lure of emerging market riches can be deceptive — especially when you consider that only 4.5% of Indonesians actually own a car — so watch this one carefully before you invest.

REA Group  (ASX: REA) is the business behind realestate.com.au. It’s another market favourite, with shares up more than 140% in the past year. Dwarfing last year’s returns to investors of Carsales and Seek, it’s now trading on a demanding price-to-earnings ratio around 40. This means investors are banking on it and Australia’s property market to keep growing fast. In September 2003 it traded at less than 45 cents, compared to $38 today.

Another property website operator with significant potential is iProperty Group (ASX: IPP). It operates websites in Singapore, Indonesia, Malaysia and Hong Kong. The share price has more than doubled since July, despite the company posting a statutory loss of $3.3 million for the six months to June 30. Profitable investments and growing revenues have impressed the market. Moreover, the idea of the next REA Group is a seductive one.

Foolish takeaway

Websites with the largest audiences gain a disproportionately large share of advertising revenues. With Internet advertising expected to account for 68% of total growth in advertising expenditure between 2012-15, established websites will continue to benefit.

Of the three mentioned, Seek has the lowest price-to-earnings ratio and looks to offer the best value. Investors should be wary of the get-rich-quick temptations of the two small-cap operators. Potential is nothing unless delivered, and their recent share price run-ups are hard to justify on the back of half-year results.

However, two of Australia’s most promising small companies are still flying under the radar. Discover these two exciting ASX investments in our brand-new special FREE report, “2 Small Cap Superstars”. Click here now, it’s free!

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Motley Fool contributor Tom Richardson owns shares in Seek.

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