Certainly, growth rates are impressive. Kayak revenue was up 48% for the first three quarters of last year, to $128 million, as users made more than 469 million requests, an increase of 37% over the year before.

And there's plenty more room to grow, given that online travel is such a big business. Consumers in the U.S., Europe and Asia made $216 billion worth of online travel purchases in 2009. Travel is the largest category of e-commerce.

I'd avoid paying pay more than about 10 times sales for Kayak, a healthy premium, compared with 6.8 times sales for Google. To calculate Kayak's price-to-sales ratio, divide its market cap, once it begins trading, by annual sales of about $180 million. The big risk here is that Google might roll out a similar travel search service, says Georgetown's Angel.


Skype provides software that lets people use computers and smart phones to talk, video chat and text via the Internet. Instead of paying for a voice plan, Skype users need only a data plan.

Talking with other Skype users is free. The company makes money by charging for calls outside its network. Skype's big advantage over traditional phone companies is that it doesn't have to build and manage networks. Skype hopes to grow in part by getting more businesses to use its service. It brought in $406 million in revenue in the first half of last year.

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There's no word on the timing of the IPO just yet, but it's worth watching for. "This is definitely a high-profile IPO," says Einhorn. "It will get a lot of interest." Skype was purchased from eBay (EBAY, news) in November 2009 by private investors, who are now spinning it out.

Demand Media

As a writer, I have mixed feelings about Demand Media. On the one hand, it barely pays writers who produce its generic "how to" content. Then it games the search algorithms at Bing and Google to drive traffic to its own sites, like ehow and livestrong.com, generating ad revenue. Critics like Josh Brown, an investment adviser at Fusion Analytic, describe this as "industrial-strength spam."

On the other hand, given the traffic and sales growth numbers, consumers seem to like it. And who am I to argue with that? Demand Media says its own sites and affiliates got more than 1.6 billion page views in November. For the first three quarters of last year, revenue was up 25% to $179 million. The company is just turning profitable.

I'm also not convinced by critics who argue that Demand's accounting is dubious, because it spreads out the cost of articles over a number of years, which boosts near-term earnings. This makes sense. After all, unlike a news article about a local snowstorm, an article on how to shovel snow will retain its value to readers.

At a proposed offering price of around $16 a share, the company would have a market cap of $1.24 billion. It brings in about $240 million a year in sales. That works out to a price-to-sales ratio of 5, which doesn't seem too rich for such a fast-growing business.

Demand does face a big challenge. At some point, all the easy articles will be logged, and it will be more costly to create new content. Or growth will have to level off.

Is the IPO a sign we are there, with 2 million articles and videos added to Demand file cabinets last year alone? Probably not. But if you make money on this stock over the next year or so, then it might be time to cash out.


GameFly looks a lot like Netflix (NFLX, news) because it rents popular video games through the mail. Given the big rise in Netflix shares, which have more than tripled in the past year to trade for $180 recently, you might look for a similar move in this stock.

But be careful with this comparison, cautions Scott Stevens of Strata Capital Management in Beverly Hills. Netflix shares have skyrocketed because of high hopes for success as it transitions to online distribution. But it's going to be a while before GameFly can make a similar transition, because streaming video games is much more complex, says Stevens. GameFly has been posting strong growth, so its stock may do well after an IPO. Just don't look for another Netflix.

Chinese Internet stocks

Given the vast potential growth for the Internet in China, it's no wonder investors love Chinese Internet stocks. There are already more than 400 million Internet users in China, and that number has a lot of room to grow, because only about a third of Chinese people use the Internet.

Throw in the twist that popular sites like Facebook and YouTube are blocked in China, and it's no surprise that investors can't wait to get their hands on companies that run similar websites there.

Oak Pacific Interactive, for example, owns China's largest social networking site Renren, which is a lot like Facebook, and Nuomi, which is like Groupon. It may come public in the first half of this year. Zynga and Sunity are two online game Web sites that are on the IPO docket.

Then there's Tudou.com, a Chinese YouTube. "In light of what happened with Youku.com, this stock is going to fly," says Taulli. (Youku.com went up over 160% in its first day of trading.) "If you can get Tudou.com at the offering, do it," he adds.

To get shares of hot IPOs early, however, you typically have to be a big customer at a brokerage that's helping the company go public. Otherwise, leave these Chinese Internet companies to the skilled traders because they are so volatile, suggests Taulli.

The big 4

That may turn out to be good advice for the big four U.S. Internet companies everyone wants a piece of. LinkedIn and Groupon will likely go public within the next several months, according to Reuters and the New York Times. Facebook and Twitter look like 2012 IPOs.

All these companies will have sky-high valuations, and their stocks are likely to be volatile. They face other challenges, too. IPO analysts like Taulli wonder what barriers protect Groupon from competitors, including the similar LivingSocial, backed by Amazon. It's not clear how Twitter makes money.

And what if the current social networking giants turn out to be fads? This may seem farfetched, but remember what happened to MySpace.

Already, there are signs of a backlash against social media. Last November, late night comic Jimmy Kimmel promoted "National Unfriend Day," encouraging people to pare fake Facebook friendships.

Books like "Alone Together," by Massachusetts Institute of Technology professor Sherry Turkle (who was recently on The Colbert Report) tell us that all the texting, tweeting and status updates crowd out true, real-world interaction.

Apologists say social media sites create more communication, not less. But even Pope Benedict XVI is not so sure. In a recent speech, he cautioned that online friendships are no substitute for the real thing.

Don't try to debate the pope on this by friending him on Facebook. He doesn't have an account.

At the time of publication, Michael Brush did not own or control shares of any company mentioned in this column.

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.