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Morning Report
GoTo.com IPO Set To Go This Week
June 16, 1999
Steve Harmon, Senior Investment Analyst
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From the time idealab founder Bill Gross first showed me GoTo.com well over a
year ago on a laptop I've been intrigued by the model of having advertisers pay for
keyword placement, with whoever pays most up top, with that cost shown to the
public. The question Wall Street will ask this week amid a fire sale for Internet
stocks, will GoTo.com's IPO also rise to the top?
GoTo.com's business model is fairly strait forward and one used commonly in
Yellow Pages, newspapers, magazines, TV. Advertisers that pay the most get the
most play, spread, air time, etc. Nothing revolutionary about that but an edge on
the way Internet search engines juggle and jostle search results, banner ad and
keyword sales.
Rather than call GoTo.com a "search engine" I see it more as an advertising engine
with a search result component. For example, if you purchased the top slot on any
keyword on GoTo.com it would be yours, unless a competitor outbids you. And
so on. An ad auction using search as the metaphor. An 'eBay' of sorts for search.
The idea is that real businesses with better products and services would outbid
those with inferior products and services, just as happens in the real world in other
media. That the thousands of unwanted search results you often get at many search
sites don't occur as frequently because those that paid appear up top.
Sounds fairly market-driven, which is why GoTo.com has grown from that simple
laptop demo to a company that now employs 75 people and with sales that look
attractive. The key attraction to me in GoTo.com is the model potentially makes the
keywords more valuable over time as companies bid and outbid each other for top
placement...so it is a market-driven revenue model that drives itself with advertisers
placing the bids themselves and not through an ad force from GoTo.com. Market
and software driven.
Those features led GoTo.com to post $1.4 million revenue for the quarter ending
March 31, 1999. Losses for the quarter were $7.4 million.
GoTo.com wants 5 million shares at $12 through underwriters led by DLJ.
With 44 million shares outstanding after the offering that implies GoTo.com seeks a
$520 million market capitalization, or what I estimate is 93x annualized revenue, on
the high side in my opinion, especially given the Internet stock market weakness
lately. Internet stocks are down 35% since mid-April.
On the other hand, search firms in the past have gone on to much higher valuations
if we look at the history of everything from Infoseek to Yahoo.
To which the argument could be made that search is over-saturated, is there room
for more? Search in the first-generation is over, but that turned them all into
companies valued at several billion dollars along the way.
GoTo.com is not in that league yet nor may it ever get there, however. Clearly
there is some work to be done before GoTo.com can be considered in the same
breath as a Lycos or even a HotBot. Especially since GoTo.com is not an Internet
media company as Yahoo is, for example.
There's also an abundance of the use of the term "Go" in rival Web firms including
Go2Net (NASDAQ:GNET) and Disney/Infoseek's Go.com. Indeed, GoTo.com
and Go.com have a court battle over a design logo since both logos use a green
light with a yellow border.
On the plus side, GoTo.com has grown from nothing to being a fairly high-traffic
service (#28 in April according to MediaMetrix with 4.4 million unique monthly
users) by being aggressive. Its syndication network lets Web sites use its simple
search box and has 40,000 networked now. Each gets paid for bringing in a
searcher, by the search result. Advertisers pay for that result click.
Performance-based ad sales. Searchers also come in via licensed search that keeps
searchers on third-party Web sites.
The downside to letting the market decide what your ad rates are, combined with
getting paid for only actual results is that it makes revenue flow at the mercy 100%
of the marketplace. GoTo.com doesn't establish a rate card per se. On the upside,
ad rates are market-driven by capitalism. Buyers bidding for top slots, top slots
selling to top buyers.
On the other hand, only those that pay the highest amount get returned, meaning
that if a Web site hasn't paid GoTo.com the most then the search may not come up
at all or near the top, even if that is the searcher was looking for. How does the
searcher know the result is relevant?
For example, a search for "Microsoft" returned an ad for CompSource, not the
company ran by Bill Gates. In fact, Microsoft's Web site was #37 on the search
results, after all the paid advertisers above it. Now that means two things 1)
Microsoft hasn't paid to play here and 2) the searcher may not get what they want,
only the highest buyer for their attention (which ought to be Microsoft with its $20
billion cash but it isn't).
idealab owns about 30% after the IPO; venture firm Draper Fisher Jurvetson owns
10.8% pro forma; Moore Capital 14%; Global Retail Partners, L.P. 4.7%.
If you're searching for how investors may find GoTo.com I see it in line with recent
Internet IPOs that have done well first day but the triple-digit runs are probably
gone for any Internet IPO for now. GoTo.com's first day? Could be $18 to low
$20s per share. We'll see once the IPO light on this one goes green.
Accolades:
"Fresh and provocative" -CBS Marketwatch, who named Steve Harmon one of
the top Internet stock analysts and only independent one honored
"I am a huge fan of Steve Harmon's analysis" -Kleiner Perkins' John Doerr
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