"We believe the secular growth of the Internet will enable Internet fundamentals to outperform," according to the report issued on Monday by Piper Jaffray senior research analysts Aaron Kessler and Gene Munster. "Whereas Internet advertising budgets were the first to be cut during the market crash in 2000, we believe the proven high ROI of online advertising today will make online advertising resilient even with a recession in the United States."

Furthermore, the analysts believe that shares of Internet companies are becoming undervalued, with 2008 EBITDA mean and median multiples of 15x and 12x, respectively.

"While we do remain concerned with the macro economic concerns (housing, oil, retail sales, unemployment, and slowdown in corporate spending), we continue to expect most Internet companies to continue to deliver solid fundamentals and believe that valuations are currently discounting much of the economic concerns," according to the report.

Still, the investment bank is maintaining its neutral view on the overall Internet sector.

On average, Piper is estimating 37% EBITDA growth for its covered companies in 2008--well above the growth of the overall market.

The ecommerce segment grew by about 20% in the fourth quarter versus traditional retail--which was essentially flat year-over-year--and it is expecting growth in the high teens in 2008.

In addition, Piper continues to look for at least 20% online ad growth in 2008 versus low single digits for all U.S. advertising.

Other predictions for 2008 include the continued fragmentation of Web audiences, along with the growth of ad networks.

"The portals will continue to assemble and consolidate off-portal network inventory to help offset the increasing user fragmentation," according to the report. "We also expect the battle for ad network deals will continue to intensify, especially between Yahoo, Microsoft, AOL, and Google."

Also, while Piper is projecting further consolidation with the Internet industry, the bank does not foresee any mega-mergers to take place in 2008--notably the merging of Microsoft and Yahoo, or Yahoo and eBay.

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