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Please don’t use the word “bubble”. I don’t care that YouTube was bought for $1.65bn or that umpteen start-ups are being funded at ridiculous valuations. That will all come out in the wash.

The reality is that two important trends are happening: first, there are many internet companies that are generating enormous profits and revenues and have decided for now to stay private. They will go public eventually. Maybe this year, maybe next, maybe in 2009. Expect about $10bn-$20bn worth (or more) of profitable dotcom companies to go public within the next two years.

Second, because of the value being created, and because none of these companies has yet gone public, expect demand to go up for the shares of the companies that do so. What happens when demand goes up but supply doesn’t increase? Stocks go up.

Regardless of the economy, the internet is going to grow next year and revenues are going to rise from both e-commerce and online advertising. This is because the percentage of advertising that is going online is climbing at the expense of print advertising, television advertising and others. Online commerce is expected to have double-digit growth as well.

Last year, internet retail sales were up 24 per cent year-over-year and we had our first $100bn-plus year in e-commerce with overall online retail sales at $102bn for 2006. Next year, online advertising is expected to rise from $18bn to $24bn and still be a single-digit percentage of overall advertising, implying there is heavy growth ahead.

Which are some of the private companies experiencing high growth? Check out Zappos.com, for instance. The online shoe retailer will sell $600m of shoes this year. There is no reason to go public. The company knows it will increase revenues and earnings over the next several years and be even more valuable going public later. So why deal with the hassle?

Another private dotcom company with several hundred million dollars in revenue is online poster seller Art.com.

Finally, companies hoarding domain names, such as Demand Media and Oversee.net, are expected to generate significant earnings before interest, tax depreciation and amortisation in 2007.

Since we cannot invest in these private businesses, it is worth looking at the most sensible place to invest in public internet companies: the list of top 20 websites, ranked by traffic. With online advertising still a small percentage of the overall advertising market, it makes sense that these sites will increasingly monetise their traffic.

I have written a lot about Yahoo in other articles so I won’t go into all my reasons for being bullish on it. But the fact is, it’s the most popular website in the world, with 117m unique users. And that doesn’t count the fact that they also own number 19, Geocities.com (21m users) and a host of other up-and-coming popular sites such as Flickr.com (the best photo-sharing site), MyBlogLog.com (the fastest growing social network for blogs), and Delicious.com (the best social search engine). Not to mention Hotjobs.com and Yahoo Finance (the largest financial website with 12m unique users). Do not count them out just because they lost search. The biggest website in the world, and growing, is going to do well this year.

Google.com is number two with 108m users (and let’s not forget YouTube.com, number 15 with 25m unique users). To my regret, I’ve never been super-bullish on Goog but I’m not bearish. If they can monetise even one more of their initiatives – say Gmail, Google Finance and Google Maps – the stock could be worth much more than it is now.

I’m also starting to like the New York Times. The company is going to have more lay-offs, shrink its pages (both in number and the width of the page) and will probably continue to lose subscribers to its print publication. But the New York Times also owns About.com, which is number 12 on the list with 38m unique users.

Let’s look at the trend in the revenues for newspaper advertising at the New York Times. It was $2.1bn in 2005, $2.08bn in 2006 and Bear
Stearns forecasts it will be $2.01bn this year. So straight down. But the revenues for About.com have risen from $43m in 2005 to $77.8m in 2006 and are estimated to climb to $105m this year. With a 50 per cent topline growth rate (and a 50 per cent margin), About.com is growing even faster than Goog and yet those ebitda numbers are stuck with the 10 times multiple the New York Times is stuck with for its overall business.

If you value About.com at Google’s multiple (in spite of About growing even faster than Goog), you get almost the value of the entire New York Times, valuing the 100-year-old newspaper part of the business at almost nothing, which is ridiculous. Eventually that will change and the New York Times will go back to $30.

I also like the fact that Bruce Sherman of Private Capital owns the stock. Bruce has the distinction of having invested in more companies sold to Warren Buffett than just about anyone else. There are a couple of other surprises on the list, including Wal-Mart, with 23m unique visitors, coming in at number 16 on the list.

james@formulacapital.com

FT Wealth will hold a live forum entitled “Is Web 2.0 a Bubble 2.0?” on Thursday. To send questions, go to www.ft.com/bubbleQ&A

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