This Earnings Season's Internet Winners and Losers

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Earnings season is in full swing, and in spite of the pessimism swirling around the markets this week as the U.S. borders on default, corporate earnings are at all-time highs. In fact, with half of the S&P 500 having reported through this Wednesday, S&P earnings are on track to hit $24.93. That's an impressive 16% above last year's total. Perhaps most tellingly, that earnings figure would be an all-time record, finally passing record earnings seen in mid-2007 at a time when phony profits from the financial sector were fueling growth.

Against this backdrop of record earnings, we're taking a peek into a few companies in the Internet space that either swiftly beat earnings or bucked the trend and disappointed investors this earnings season.

 The winners' circle

Company

Earnings Estimate

Actual Earnings

Return Through Earnings Season

Google (NAS: GOOG) $7.85$8.7416%
Baidu (NAS: BIDU) $0.66$0.7211%
Amazon.com (NAS: AMZN) $0.35$0.415%

Sources: Thomson and Google Finance. Data through July 28.

Google helped set the tone for earnings season with blowout earnings. Headed into its report, there were rampant fears that new CEO Larry Page's free-spending ways would dampen company profits.  However, operating expenses stayed in check, while the company managed to add an impressive margin to the amount it collects per ad-click. For Google, the quarter can be summed up in a pretty simple equation: Lower-than-expected costs + surprisingly high revenues = huge earnings beat.

Baidu is notorious for smashing earnings and making lowballing analysts look clueless. A stunning and often overlooked aspect of Baidu's earnings is the mammoth margins the company is putting up. In the most recent quarter, net profit margins checked in at 47.8%. Even more impressive, the company saw advertisers increase the amount for leads through the search engine by an astounding 53% last quarter. Throw in the 17% increase in total marketing customers, and you see how Baidu is able to generate such strong year-over-year growth. With Baidu now controlling 86% of the Chinese search market, the company's proclivity for smashing earnings estimates should continue into the coming quarters.

Amazon's "blowout" earnings featured such headline figures as an 8% earnings drop and guidance for the current quarter's operating income to fall by up to 93%! No, this isn't your father's earnings beat. Still, Amazon is seeing sales grow at their highest rate since the dot-com bubble, so investors are willing to forgive the company for its emphasis on plowing money into growth initiatives. Amazon has always been a forward-looking company. Whether it was the e-tailer's early foray into cloud computing or its Kindle project, Amazon has routinely been ahead of trends. With investors bidding up shares despite weak forward earnings guidance, it looks as though Jeff Bezos & Co. are finally getting the benefit of the doubt.

The losers' circle

Company

Earnings Estimate

Actual Earnings

Return Through Earnings Season

Travelzoo (NAS: TZOO) $0.39$0.30(27%)

Sources: Thomson and Google Finance. Data through July 28.

Travelzoo felt the wrath of Wall Street after it not only missed on earnings but also failed to meet sales targets. With 65% of shares outstanding sold short, it's not surprising that Travelzoo saw its stock plunge the day after reporting. There were, however, several positives in the company's report: Europe continues to excel, and revenues healthily exceeded subscriber growth. However, when you're priced for perfection in the crowded travel and deal-of-the-day field, even the slightest of misses can send shares tumbling.

Looking ahead
There's still plenty of earnings action in the week ahead. Here are some notable companies in the space you should be watching.

  • Sohu (NAS: SOHU) reports Monday morning before the market opens. It shouldn't shock you if the company beats earnings, as the company is notorious for smashing analyst estimates. The pros are expecting earnings per share of $1.06, up 29% from the year-ago period.
  • LivePerson (NAS: LPSN) reports next Thursday after markets close. The company delivered excellent first-quarter results but disappointed investors when it implied trouble ahead by failing to raise its full-year guidance. With analysts expecting a sequential drop in earnings, beating expectations could show that the company was being conservative with its guidance last quarter and is better positioned for growth than expected.

That's it for our roundup of this earnings season in the Internet sector. If you'd like to stay updated on all things Internet-related, follow me on Twitter, where I'm on the lookout for great buys as part of my Rising Stars Portfolio. Or make sure to add any of the companies mentioned here to our free My Watchlist service, which provides up-to-date news and analysis on all your favorite companies:

At the time this article was published Eric Bleeker owns shares of no companies listed above. You can follow him on Twitter to see all of his technology and market commentary.The Motley Fool owns shares of Google.Motley Fool newsletter serviceshave recommended buying shares of Amazon.com, Baidu, Sohu.com, Google, LivePerson, and Travelzoo. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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