IndustryAnalyzing Search Engines as Investments

Analyzing Search Engines as Investments

Search has become increasingly popular, but do the common stocks of search engines make a good investment? High-tech investment analysts share a glimpse of the techniques they see to value publicly traded search firms, and which companies appear to be succeeding.

Search has become increasingly popular, but do the common stocks of search engines make a good investment? High-tech investment analysts share a glimpse of the techniques they see to value publicly traded search firms, and which companies appear to be succeeding.

A special report from the Search Engine Strategies 2003 Conference, August 18-21, San Jose, CA.

A longer version of this article that goes into more extensive detail about the financial analysis of search engine companies is available to Search Engine Watch members.
Click here to learn more about becoming a member
.

The Job of a Financial Analyst

Many people know that financial analysts research investment opportunities for their company and clients. Fewer are aware, though, of how a financial analyst conducts research, or how they relate it to search advertising. Eric Martinuzzi, a Senior Research Analyst/Internet Analyst for Craig-Hallum Capital Group LLC, provided an overview of this process.

“We’re an institutional equity and investment banking firm specializing in the needs of institutional investors and growing companies,” said Martinuzzi. “We study these companies and bring researched investment opportunities to money managers. We also offer fundamental investment analysis of publicly traded securities.”

So what does a financial analyst look for when researching publicly traded securities? Two key things: freshness and fundamentals. An analyst must always make sure data is fresh and valuable to money managers. “We have to uncover companies in either turnaround status, or emerging – before anyone else does,” said Martinuzzi.

The Financial Analysis of Search

Financial analysts have watched and measured consumer behavior with search engines over the past several years. In aggregate, the analysts on the panel were overwhelmingly positive about the prospects for search. It has exceeded expectations — and importantly, search advertising is here for the long-term.

“Search is a very real and a very fast growing business,” said Safa Rashtchy, Principal and Senior Internet Analyst for U.S. Bancorp Piper Jaffray. “From almost nothing 2 years ago, search is now a $1.5 billion industry and is on track to exceed $2.1 billion for 2003, and up to $7 billion by 2007″ – a 50% annual rate of growth. Search is clearly big revenue maker for the portals are they are becoming increasingly reliant on this revenue.”

“To me, when I first looked at what paid search was, now here’s an industry with a tail end,” added Martinuzzi. “And by that I mean that I don’t even need to be an expert. I can just go out and buy the basket of these [search” securities and still do well, as opposed to doing a dartboard with an application company that may or may not be there in the foreseeable future.”

While Rashtchy’s statistics demonstrated that actual search volume grew at less than 5% and 7.5% for 2002 and 2003, paid advertising has doubled its own revenue figures every year.

Why Search is Rising

Search advertisers have known for years about the proven success of their own industry. So what’s new about search to finally get the attention Wall Street and the general advertising public?

“Search advertising has now gone mainstream,” said Rashtchy. “Advertisers are increasingly relying on search advertising to fuel their online marketing and e-commerce. It’s a sustainable industry that’s benefiting everyone: users, merchants, portals, and the search technologies. Even most ad agencies now have some type of search advertising program.”

A good deal of that growth, according to Rashtchy, can be attributed to small businesses. “What fueled paid search advertising’s growth in U.S. is that it has an efficient small business market,” he said. “Overture was fueled originally by the small business infrastructure.”

Martinuzzi added that the advantage of investing in a search company is that there’s not a lot of competition, by comparison, to other industries. “There is fierce competition when it comes to competing for the distribution ad,” he said, “but on the advertiser side, it is such a new industry and market that we have yet seen a true price appreciation to advertisers, which is great to advertisers who are getting a good bargain right now. That’s just another sign of the legs of this industry.”

Money going into search advertising can also mean money being removed elsewhere. So where are the revenues for online search being diverted from?

“In the beginning, it will probably come from other forms of online advertising,” said Rashtchy. “Gradually, it will come from TV and some other types of broadcast advertising.”

Questions and Concerns

Some audience members expressed concerns. One asked that with all of this increased advertising if there would be a backlash. “When it comes to search ads, most people still have no idea of what’s an ad and what’s a listing,” Sullivan stated. “But the truth lies in between what the FTC says and what the search engine advertisers say. Ads are useful in the context that you use them.”

Sullivan also cautioned that if search engines get caught up in the monetization and their relevancy fails, the engines will see a backlash, and consumer agencies will come in and establish guidelines.

The inevitable question for the financial analysts: When is Google going to do an initial public offering of shares, or will they ever? Why not stay private as long as they can? And what impact will it have when they do come out?

“If and when it happens, it’s going to raise the profile,” said Martinuzzi. Google is such a common thing people do. It is one of the great brands out there. Search advertising issues are going to be much higher profile when this thing happens.”

Grant Crowell is the CEO and Creative Director at Grantastic Designs, Inc., founded in 1993 in Honolulu. He has 15 combined years of experience in the fields of print and online design, newspaper journalism, public relations, and publications.

A longer version of this article that goes into more extensive detail about the financial analysis of search engine companies is available to Search Engine Watch members.
Click here to learn more about becoming a member
.

Search Headlines

NOTE: Article links often change. In case of a bad link, use the publication’s search facility, which most have, and search for the headline.

LookSmart preparing for life after MSN
Netimperative Oct 29 2003 2:40PM GMT
Google eyes book search
CNET Oct 29 2003 1:53PM GMT
Google: Have money, will travel
Yahoo Oct 29 2003 11:16AM GMT
Web Group Backs Microsoft in Patent Suit
New York Times Oct 29 2003 4:47AM GMT
Yahoo acquires BT content sites
CNET Oct 29 2003 1:48AM GMT
New data says there’s lots of new data
CNET Oct 29 2003 0:42AM GMT
Verity, Factiva team on corporate search
CNET Oct 29 2003 0:23AM GMT
LookSmart Rises After Earnings Report
TheStreet.com Oct 28 2003 11:52PM GMT
Bidway.com Challenges AOL and Google over Search Patent
Auctionbytes.com Oct 28 2003 11:19PM GMT
Group lobbies for domain buyers’ privacy
CNET Oct 28 2003 8:19PM GMT
Search buy pushes ValueClick into profit
Netimperative Oct 28 2003 12:57PM GMT
Yahoo Buys BT Music Site
Forbes Oct 28 2003 12:34PM GMT
How to Google Hack
WebTalkGuys Radio Oct 28 2003 11:24AM GMT
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