The Internet: Eight Predictions for 2008

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From Standard & Poor's Equity Research

Lots of private companies were acquired, including a firm we mentioned last year, LiveDeal (LVDL; $4; not ranked by S&P). A company we identified as one to watch in 2005, SideStep, announced its pending acquisition by online travel competitor Kayak in December.

Our predictions for 2008:

1. We do not expect the European Commission to simply "rubber stamp" Google's proposed purchase of DoubleClick. Despite the FTC's approval, we do not think the deal's consummation is a forgone conclusion. Remember General Electric (GE)-Honeywell (HON)?

2. Google will continue to make inroads in the mobile segment. But we don't expect the company to win spectrum at the upcoming 700 megahertz auction, become a wireless carrier, or introduce a Google phone, or Gphone, in 2008.

3. We project 39% growth in Google's 2008 gross revenues, but believe competition is going to contribute to further margin compression. We expect the pace of market share gains to decelerate and see some major partner losses.

4. We think Yahoo will have a better 2008 than 2007. Perhaps that's not going out on a limb after last year's drama, but despite the negative sentiment, the stock fell only 6% in 2007. We expect to see more thought leadership and innovation from the company in 2008. Most important, we think, Yahoo has already started to realign employees, and we would not be surprised if layoffs were announced and applauded by Wall Street.

5. eBay will continue to focus on, and do better relative to, the expectations of two core constituencies -- users and shareholders. We expect further improvements to the eBay (EBAY; $33; strong buy) website and "the customer experience." We also would not be surprised by more aggressive share buyback activity. The stock is one of our top picks for 2008 -- its P/E was recently less than 20 times our 2008 earnings forecast -- and we think it's a compelling value.

6. We expect VeriSign to exit the content delivery network (CDN) business, and sell its peer-to-peer-focused operations to a strategic buyer looking to diversify its offerings and gain market share. We think a large telecommunications firm is a possible acquirer. Regardless of who the buyer is, we believe this will increase competition in the CDN segment, further pressuring market leader Akamai Technologies (AKAM; $34; sell).

7. Despite continuing problems in the housing market, we think online real-estate company Move will outperform the S&P 500 this year. We expect real-estate advertisers to spend more of their advertising/marketing budgets online, and expect Move (MOVE; $2; buy) to benefit. We like the recent additions to the management team, new priorities and investment discipline, and greater focus on delivering shareholder value. Move also has what we consider a strong balance sheet. We remind readers that this stock isn't for the faint of heart.

8. Last but not least, notwithstanding the credit crunch, we expect at least one blockbuster (i.e., multibillion-dollar) non-IPO financial transaction in the Internet segment to be announced in 2008. It could be a major acquisition in the content/advertising area. It could be the spin-off of a non-strategic business. Internet companies still largely have very profitable business models and strong balance sheets, and are increasingly focused on delivering shareholder value.

We'll revisit these predictions next January.

Kessler follows technology stocks for S&P Equity Research .