THE MINI-BUBBLE IN SEARCH FIRM STOCKS
SAN FRANCISCO (CBS.MW) -- In recent days Internet names, like Yahoo,
EBay and Amazon.com have hit new highs.
In fact, EBay managed to score a 52-week highpoint for the third
consecutive day. Even Yahoo raced ahead by 8 percent on the launch of a
subscription service it announced a month ago. Who didn't know it was
coming?
Since I've suggested in early January that in a war economy, Internet
names will be the big beneficiaries rather than the traditional
blue-chip tech names, I've enjoyed the green on my stock screens. See:
War stocks? Try the Internet.
cbs.marketwatch.com/news/...95%2D4D42%2DBB82%2D292D6A9999DB%7D
But one area that does look increasingly vulnerable is the search
sector -- where one of the more contentious Web-domination battles
rages
on.
The market caps of this group have swelled since last fall. It's become
a mini-bubble for those nostalgic for the bubble days. To be sure, it's
been offset by the implosion of the leading paid-search provider
Overture (OVER), and some trimming of gains from LookSmart (LOOK).
When a sell-side analyst throws a conference focused specifically on
this industry, it's almost a sure sign that the best days are behind
all
these stocks.
After all, it's war -- in the search business -- and, there are certain
to be far more casualties, missteps, or strategic blows before it's
over. Margins are never safe in a war.
On Tuesday, U.S. Bancorp Piper Jaffray analyst Safa Rashtchy will hold
a gathering of the who's who in the search world, from Overture,
Google,
Yahoo, Ask Jeeves (ASKJ), Terra Lycos (TRLY), LookSmart (LOOK),
FindWhat
(FWHT), as well as privately-held Fast and Google and Alta Vista, which
is in the process of being sold to Overture.
The posturing by each player is almost as high-pitched, theatrical and
fluid, as the maneuvering by members of the U.N. Security Council in
recent weeks. But before investors get too caught up in the show, it's
probably a good time to take in some recent bubble history.
The search group as a whole has been inflated, partly on the notion
that the search pie will keep growing and each company will get a
healthy slice of it.
If one isn't careful in considering where and how the sales are being
generated, one could be lured into believing the industry is larger
than
it really is -- much like Internet advertising some years ago, or the
business-to-business market.
__________________________________________________
REVENUE SPLITS
Just look at the interdependency of all the search players.
Google is said to be on a sales run-rate of $500 million this year. But
since Google signed on its deal with AOL Time Warner last year, at
least
one hedge fund manager believes that about $200 million to $225 million
of Google's sales come from AOL Time Warner (AOL).
Then there is Ask Jeeves, which is expected to generate $96 million
this year, but much of those sales (not to mention the profits) come
from its deal with Google. Recently, Ask Jeeves' CEO told an investment
group that Ask Jeeves should be a tracking stock for Google.
Looksmart, which provides a directory of searches -- tied more to good
old humans than technology -- is expected to generate $146.6 million,
with much of that coming from its partnership with Microsoft (MSFT).
Overture is expected to generate $1 billion (of which Yahoo could
account for about $300 million and Microsoft's MSN another $300
million).
Fast's Web technology business and Alta Vista are expected to generate
$25 million to $30 million this year for Overture.
Yahoo is expected to generate about $205 million to $220 million in
search this year, but all of that comes from its partnership with
Overture. In fact, it's estimated that more than half of Yahoo's cash
flow comes from Overture. Yet Overture is hitting 52-week lows while
Yahoo reaches 52-week highs, implying a bit of disconnect to me.
Inktomi, which has been purchased by Yahoo, could, however, generate
about $40 to $50 million in 2003 for the online media company. Of
course, Inktomi's success will rest on Yahoo re-launching its search
business with bells and whistles (just at it boots Google as a vendor
at
the same time).
Then there is FindWhat.com, which is expected to generate $60.8
million, which relies on smaller sites, and Espotting, which says it's
on track to reach $100 million in sales this year, as search mania
expands to Europe.
Now, the fact that there is a lot of interdependency here is not a
secret.
That's why there is so talk of consolidation, and, in fact, a lot of
consolidation that's already taken place. To wit: Yahoo's purchase of
Inktomi and Overture acquisition of Fast's Web business and Alta Vista.
But the zeal over the opportunities surrounding this group does sound
familiar. And unless the Internet bubble experience was in vain,
investors should think about whether the numbers projected are
realistic.
Recall that many investors thought CPMs (price per 1000 impressions)
would rise, or at least remain stable, because online advertising would
be more targeted and rich media advertising would drive CPMs higher.
What happened was exactly the opposite, higher click-through-rates
never materialized because even though the volume of ads increased, it
didn't increase the amount of times a person would click on that
advertisement.
__________________________________________________
THE EROSION OF PAID LISTINGS
The opportunity for the search business is estimated to be between $1.1
billion and $1.5 billion this year. That's expected to grow to $5
billion by 2005, as estimated by First Albany. The paid inclusion
market, as estimated by First Albany is expected to grow from $200
million to $800 million in 2005 and $1.6 billion in 2007.
That revenue depends largely on several variables: more searches or
pages that advertisers are willing to spend their money on, more people
searching, and more searches per person.
Yahoo says that 35 to 40 percent of its searches will have at least one
advertiser in 2003. That's expected to go up to 40 to 45 percent in
2005. The amount of times a person is expected to click onto an
advertisement is also expected to rise. The click-through-rate is
expected to go up to 19 percent or so, up from 12 percent in 2003. And,
the price-per-click is expected to rise from 30 to 35 cents to 40 to 45
cents by 2005.
While I don't doubt that search results will improve, if history is any
guide, it'll be a challenge for click-through rates and price-per-click
to keep up with the ever-increasing ads attached to search volume.
In other words, just because more search queries have advertisers
doesn't necessarily mean that more people will be clicking on those
ads.
Equally important is the payment per click that the advertiser is
willing to pay for. If people won't be clicking through as much as the
industry would like, why would the average price-per-click go up?
In other words, even if more people use search to be informed, they may
not be the best lead.
So, even if there is a bit of experimental revenue going around, in
this environment advertisers won't be doing that for too long unless
they can prove that their money is being well spent.
SAN FRANCISCO (CBS.MW) -- In recent days Internet names, like Yahoo,
EBay and Amazon.com have hit new highs.
In fact, EBay managed to score a 52-week highpoint for the third
consecutive day. Even Yahoo raced ahead by 8 percent on the launch of a
subscription service it announced a month ago. Who didn't know it was
coming?
Since I've suggested in early January that in a war economy, Internet
names will be the big beneficiaries rather than the traditional
blue-chip tech names, I've enjoyed the green on my stock screens. See:
War stocks? Try the Internet.
cbs.marketwatch.com/news/...95%2D4D42%2DBB82%2D292D6A9999DB%7D
But one area that does look increasingly vulnerable is the search
sector -- where one of the more contentious Web-domination battles
rages
on.
The market caps of this group have swelled since last fall. It's become
a mini-bubble for those nostalgic for the bubble days. To be sure, it's
been offset by the implosion of the leading paid-search provider
Overture (OVER), and some trimming of gains from LookSmart (LOOK).
When a sell-side analyst throws a conference focused specifically on
this industry, it's almost a sure sign that the best days are behind
all
these stocks.
After all, it's war -- in the search business -- and, there are certain
to be far more casualties, missteps, or strategic blows before it's
over. Margins are never safe in a war.
On Tuesday, U.S. Bancorp Piper Jaffray analyst Safa Rashtchy will hold
a gathering of the who's who in the search world, from Overture,
Google,
Yahoo, Ask Jeeves (ASKJ), Terra Lycos (TRLY), LookSmart (LOOK),
FindWhat
(FWHT), as well as privately-held Fast and Google and Alta Vista, which
is in the process of being sold to Overture.
The posturing by each player is almost as high-pitched, theatrical and
fluid, as the maneuvering by members of the U.N. Security Council in
recent weeks. But before investors get too caught up in the show, it's
probably a good time to take in some recent bubble history.
The search group as a whole has been inflated, partly on the notion
that the search pie will keep growing and each company will get a
healthy slice of it.
If one isn't careful in considering where and how the sales are being
generated, one could be lured into believing the industry is larger
than
it really is -- much like Internet advertising some years ago, or the
business-to-business market.
__________________________________________________
REVENUE SPLITS
Just look at the interdependency of all the search players.
Google is said to be on a sales run-rate of $500 million this year. But
since Google signed on its deal with AOL Time Warner last year, at
least
one hedge fund manager believes that about $200 million to $225 million
of Google's sales come from AOL Time Warner (AOL).
Then there is Ask Jeeves, which is expected to generate $96 million
this year, but much of those sales (not to mention the profits) come
from its deal with Google. Recently, Ask Jeeves' CEO told an investment
group that Ask Jeeves should be a tracking stock for Google.
Looksmart, which provides a directory of searches -- tied more to good
old humans than technology -- is expected to generate $146.6 million,
with much of that coming from its partnership with Microsoft (MSFT).
Overture is expected to generate $1 billion (of which Yahoo could
account for about $300 million and Microsoft's MSN another $300
million).
Fast's Web technology business and Alta Vista are expected to generate
$25 million to $30 million this year for Overture.
Yahoo is expected to generate about $205 million to $220 million in
search this year, but all of that comes from its partnership with
Overture. In fact, it's estimated that more than half of Yahoo's cash
flow comes from Overture. Yet Overture is hitting 52-week lows while
Yahoo reaches 52-week highs, implying a bit of disconnect to me.
Inktomi, which has been purchased by Yahoo, could, however, generate
about $40 to $50 million in 2003 for the online media company. Of
course, Inktomi's success will rest on Yahoo re-launching its search
business with bells and whistles (just at it boots Google as a vendor
at
the same time).
Then there is FindWhat.com, which is expected to generate $60.8
million, which relies on smaller sites, and Espotting, which says it's
on track to reach $100 million in sales this year, as search mania
expands to Europe.
Now, the fact that there is a lot of interdependency here is not a
secret.
That's why there is so talk of consolidation, and, in fact, a lot of
consolidation that's already taken place. To wit: Yahoo's purchase of
Inktomi and Overture acquisition of Fast's Web business and Alta Vista.
But the zeal over the opportunities surrounding this group does sound
familiar. And unless the Internet bubble experience was in vain,
investors should think about whether the numbers projected are
realistic.
Recall that many investors thought CPMs (price per 1000 impressions)
would rise, or at least remain stable, because online advertising would
be more targeted and rich media advertising would drive CPMs higher.
What happened was exactly the opposite, higher click-through-rates
never materialized because even though the volume of ads increased, it
didn't increase the amount of times a person would click on that
advertisement.
__________________________________________________
THE EROSION OF PAID LISTINGS
The opportunity for the search business is estimated to be between $1.1
billion and $1.5 billion this year. That's expected to grow to $5
billion by 2005, as estimated by First Albany. The paid inclusion
market, as estimated by First Albany is expected to grow from $200
million to $800 million in 2005 and $1.6 billion in 2007.
That revenue depends largely on several variables: more searches or
pages that advertisers are willing to spend their money on, more people
searching, and more searches per person.
Yahoo says that 35 to 40 percent of its searches will have at least one
advertiser in 2003. That's expected to go up to 40 to 45 percent in
2005. The amount of times a person is expected to click onto an
advertisement is also expected to rise. The click-through-rate is
expected to go up to 19 percent or so, up from 12 percent in 2003. And,
the price-per-click is expected to rise from 30 to 35 cents to 40 to 45
cents by 2005.
While I don't doubt that search results will improve, if history is any
guide, it'll be a challenge for click-through rates and price-per-click
to keep up with the ever-increasing ads attached to search volume.
In other words, just because more search queries have advertisers
doesn't necessarily mean that more people will be clicking on those
ads.
Equally important is the payment per click that the advertiser is
willing to pay for. If people won't be clicking through as much as the
industry would like, why would the average price-per-click go up?
In other words, even if more people use search to be informed, they may
not be the best lead.
So, even if there is a bit of experimental revenue going around, in
this environment advertisers won't be doing that for too long unless
they can prove that their money is being well spent.
