ANALYST WATCH: Diversification pays off for Go2Net

Go2Net's strong second-quarter results this week prove the Internet content aggregator isn't just another dime-a-dozen 'Net stock long on promise but short on execution and flexibility.

In the quarter, Go2Net (Nasdaq: GNET) soared past analysts' estimates, earning $10.8 million, or 22 cents a share, on sales of $23 million.

More impressive, Go2Net demonstrated that although online advertising revenue is still represents a significant portion of its core revenue base, it's not putting all its eggs in one basket.

Internet analysts and Internet content providers have recently bemoaned sluggish online advertising sales as more and more fledgling Internet companies struggle to merely stay in business.

Go2Net's management had the foresight to realize it must go beyond the pedestrian banner advertisements that served as the lynchpin of its business model to include consumer services, business services and other user-friendly technologies.

That $23 million in sales quadrupled the year-ago figure when it earned $3.7 million, or 7 cents a share, on sales of $5.7 million.

Analysts were especially impressed with the 52 percent sequential growth in non-advertising revenue in the quarter. In fact, non-advertising sales represented 52 percent of the company's total sales this quarter.

"Go2Net’s model is proving to be highly lucrative and scalable: focusing on building vertical contents, not a single brand; gaining critical mass through vertical platforms; and expanding revenues by licensing its platform," said Safa Rashtchy, an analyst at USB Piper Jaffray.

While it's successfully evolving into a well-rounded, full-service aggregator, it's consistently improving its traffic figures while jockeying for first-mover status in the all-important broadband arena. In fact, it's teaming up with Paul Allen's Vulcan Ventures to figure out how to take its content and services into rapidly emerging broadband world.

Keep in mind, Go2Net accommodated more than $310 million in e-commerce transactions in the third quarter. Its Authorize.Net payment processing service picked up 12,000 merchants during the period, bringing the total to more than 82,000.

Its page views in June surged to 37.5 million, up 103 percent from the year-ago quarter and its popular HyperMart Network for small business owners now boasts a robust membership in excess of 1 million users.

However, all this diverse growth doesn't mean Go2Net's not interested in the online advertising base that was its bread and butter for so long.

Go2Net's advertiser base rose to 597 at the end of June, up from 358 in the year-ago quarter.

CEO Russell Horowitz told ZDII the company expects "at least two-thirds" of the company's future sales to come from licensing and commerce. He added that only 5 percent of its core advertising sales came from what he considered marginal Internet companies.

This is all well and good, but investors are more concerned with the state of the company's stock.

After soaring up to a 52-week high of 111 3/4 in December, Go2Net shares faded to a low of 35 3/4 in May.

Analysts expect Go2Net shares to make steady if not spectacular growth through the rest of the year.

"Considering this recent price strength and the relatively modest EPS upside (after backing out non-operating factors), we expect investors may take near-term profits on these results," Rashtchy said in a research note. "However, we note that GNET's 3Q results represent another over-delivery on the company’s commitment to the Street, and that GNET represents a solid core Internet holding for long-term Internet investors."

As if the evolution into broadband and licensing businesses isn't appealing enough, consider that Go2Net exited the third quarter with $227 million in cash.

Five of the six analysts following the stock rate it either a "buy" or "strong buy."