Posted 1/23/98
Archived 1/30/98
Featured Companies
1-year vs. S&P
Yahoo!
Excite
Infoseek
Lycos
Revving Up the Search Engines
Valuations are high, but the four key players taming the wild, wild Web are finally finding a way to
power into profitability.
By Philip Bulman
Explosive growth in the number of people using the Internet has helped to send the stock
prices of specialized search-service companies to stratospheric levels.
Share prices of the main four search-engine firms -- Yahoo! (YHOO), Excite (XCIT), Infoseek
(SEEK) and Lycos (LCOS) -- have doubled and tripled during the past year, and some stock
prices may well double again in the coming year. But shares are expected to be very volatile
along the way as investors puzzle out the proper valuation of companies that direct Web
users to information.
Why the enthusiasm for companies that are bleeding money or barely profitable?
Internet usage continues to grow at a rapid pace, partially due to the flat-rate
access plans offered by Internet service providers.
Sales of personal computers have been relatively strong, and many people are buying
PCs specifically to get online.
Advertising dollars that once flowed to other media are now buying ads at
search-engine home pages -- and several major companies, such as International
Business Machines (IBM) and Intel (INTC), have announced plans to strongly boost
their online ad spending this year.
Snapshot
1-year Chart
Overview
Earnings Estimates
Yahoo!, of Santa Clara, Calif., is the clear leader in the search-engine business and, despite
an extremely high price-earnings ratio, is considered one of the safest bets in this pretty
risky industry.
The company was the first in the industry to turn a profit, and today has a stunning 50%
market share among the top four search engine services, as measured by page views per
day -- the Internet's equivalent of television's Nielsen ratings. Yahoo! claims some 50 million
page views per day, according to Jupiter Communications of New York. That's a mass
audience. Yahoo!, whose stock is up 350% over the past 12 months, has also established the
strongest brand name in this emerging market, a key factor in helping them attract
advertisers and electronic retailers.
Additionally, Yahoo! was among the first companies to offer free electronic-mail services to
users. Free e-mail, which is now offered by Microsoft Network and many other companies,
virtually ensures regular return visits, making a site even more attractive to advertisers
and retailers, said Paul W. Noglows, an analyst who covers Internet stocks for Hambrecht &
Quist (HQ). "You're seeing the services trying much more to turn users into members," he
said. Microsoft is the publisher of Investor.
Part of the reason for investor enthusiasm about Yahoo! is its expansion into the full gamut
of online commerce, a move that will make the company more profitable over the long term,
Noglows said. "I think what you're seeing is that these things have evolved beyond search,"
he said.
Snapshot
1-year Chart
Overview
Earnings Estimates
Excite Inc. (XCIT) of Redwood City, Calif., is currently second in the market-share race,
with 28 million page views per day. The company, whose shares are up 185% in the past
year, offers several search services, including its popular WebCrawler.
Earlier this year, Excite announced that Intuit Inc. (INTU), the personal-finance software
firm, would invest $40 million in the company for about 19% of its stock. The two companies
have created Excite's business and investing channel, which features personal-finance
information and could become a major platform for attracting both advertisers and
retailers.
Excite should become profitable by the third quarter of 1998, according to projections by
Keith Benjamin, an analyst who follows Internet stocks for BancAmerica Robertson Stephens
& Co. Benjamin believes Excite stock (and that of Yahoo!) could more than double in value
during the next year.
"The winners are going to wind up with significant earnings and revenue growth," he said.
Yet he expects continued volatility in share prices even among the strongest search engine
stocks. Traffic and advertising revenues will grow with the Web itself, a factor that may
prove even more significant than establishing a brand name, Benjamin said.
Snapshot
1-year Chart
Overview
Earnings Estimates
Snapshot
1-year Chart
Overview
Earnings Estimates
Lycos, of Marlboro, Mass., has about 12 million page views per day. The company offers
general search-engine services, but has tried to position itself to appeal strongly to
businesses, with some success. Lycos recently won an opportunity to increase its traffic
and revenues when it was selected as the exclusive provider for the Microsoft Active
Channel Guide in Microsoft Internet Explorer 4.0.
The Active Channel Guide will take advantage of Lycos' search technology to enable users to
locate channels of interest from among the thousands being developed. Noglows notes that
Lycos also has a diversified revenue stream, with as much as a quarter of its revenues
coming from sources other than advertising, such as software licensing. The company
recently turned the corner to profitability a year before analysts expected it to, becoming
the industry's second profitable company. "I think they'll be increasingly profitable in the
year ahead," Noglows said.
Infoseek Corp. (SEEK) of Sunnyvale, Calif., draws some 10 million page views per day. Bruce
D. Smith, who follows the Internet industry for Merrill Lynch, believes Infoseek's position in
fourth place in a field of four has led to the stock being grossly undervalued. "I am extremely
bullish on the entire group. My estimates are they'll all start making money by the end of
'98," he said. The stock has advanced just 23% in the past year.
Infoseek has twice as many users as it needs to become profitable, Smith said. "Critical mass
is about 4 or 5 million page views. They'll be solidly profitable in 1999," he said. The company's
stock price could double in the coming year as investors come to perceive Infoseek as a
viable contender in the four-way race, Smith said.
Despite the glowing reports, these stocks are not for everyone. "I think they make sense
for investors who are taking a very long-term view of the Internet," Noglows said.
If you're measuring
earnings, you're
measuring the wrong
thing.
-- Steve Harmon
These are the new
AOLs, Prodigies and
CompuServes.
-- Steve Harmon
One reason Smith is so positive about the search-engine stocks is that he believes the
current field of four competitors may well remain stable as ad revenues and e-commerce
sales continue to increase. Valuation of these stocks is particularly challenging because the
industry is so new and dynamic.
"It's very premature to count earnings. The price-earnings ratios are astronomical, or
downright ineffable," said Steve Harmon, senior investment analyst at Mecklermedia. "If
you're measuring earnings, you're measuring the wrong thing," he insists.
Harmon recently analyzed the stocks by market capitalization and number of users. The
Yahoo! market cap (at close to $3 billion) is equivalent to $160 per user. The others were
significantly lower, with Lycos at $88 per user, Excite at $44 and Infoseek at $40.
Comparable figures for the online-service companies include $159 for America Online (AOL)
and $190 for Microsoft's Web sites, according to Harmon's estimates. The figures reveal
that Excite and Infoseek are particularly undervalued by the market, Harmon said.
Additionally, Harmon believes that the search-engine companies increasingly are modeling
themselves after America Online, and will soon present a serious competitive threat to the
online-services companies. "These are the new AOLs, Prodigies and CompuServes," he
predicted.
Still, the market is evolving rapidly. Many advertisers are still leery of the Internet, which
may prove to be an ineffective advertising medium. And as the search engine companies
expand their services to include e-commerce and e-mail, they will encounter ferocious
competition from the well-capitalized online-services companies.
The battle for search will really reach a high pitch this year. And the rewards will be matched
only by the risk.
Discuss It
Email the Author
Email the Editors
Product Support
Worried about security? Please read this.
If you're not using Microsoft Internet Explorer, you're not seeing all that Microsoft Investor has to offer.
Terms of Use. c 1997 Microsoft Corporation and/or its suppliers. All rights reserved.
Market information is supplied by PC Quote, Inc. and delayed at least 20 minutes. Data Source: PCQ
pcquote.com
Investor's editorial goal is to provide a forum for investment ideas. Our articles and columns should not be construed as investment advice, nor does their appearance imply an
endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances. |
