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Search engine stocks look good

Search companies are expected to report improved quarterly results, which may push their stock prices, recently fueled by a number of deals and partnerships, even higher.

4 min read
Search companies are expected to report improved quarterly results for the most part. The results may push their stock prices, which recently were fueled by a number of announced deals and partnerships, even higher.

Search engines have expanded their business models to incorporate e-commerce deals with big consumer brands, a move that analysts have been prodding the companies to take. The navigational sites tend to draw a lot of attention from big-brand consumer companies--offering big revenue potential as more exclusive deals come their way.

"We continue to see mainstream consumer advertisers coming online and contracts are getting longer and the numbers are getting bigger," said Andrea Williams, an analyst with Volpe Brown Whelan. "We should see an influx in this kind of deal between now and the end of the year because there are a limited number of slots. If companies want to get in front of people, they need to move fast and block out the competition, otherwise the competition will block them out."

Recently, Excite and Preview Travel announced that they are expanding their marketing partnership for online travel.

Yahoo (YHOO) announced that CDnow would become the premier music seller featured on the popular Net directory. It will offer users direct links to CDnow music products. And Lycos announced a three-year e-commerce partnership with BarnesandNoble.com. The news followed competitors Yahoo and Excite's similar marketing pacts with Amazon.com, Barnes & Noble's chief competitor.

Analysts largely expect losses this quarter
Company Period Estimate per share Report date
1997 Q3 1 cent Oct. 8
1998 Q1 -3 cents Late Nov.
1997 Q3 -49 cents Oct. 14
1997 Q3 -17 cents Late Oct.
Source: First Call

Stock prices for these companies have doubled and tripled in the past two or three months, as their deals with a number of companies have been announced.

When companies don't have earnings, a good way to see how expensive they are compared to their peers is by looking at market capitalization to revenue, said Greg Vogel, an analyst at Montgomery Securities, explaining that the comparison gives a look at how fast a company is growing.

Based on a consensus of revenue estimates and today's closing stock prices, Yahoo is trading at 26 times the next 12 months of expected 1998 revenue. Excite is trading at 5.6 times expected revenue; Infoseek (SEEK) at 3.7 times expected revenue; and Lycos at 11.4 times expected revenue.

Meanwhile, the quarter is expected to show further improvements for these companies.

Yahoo is expected to report profits of 1 cent per share for the quarter ending September 30, compared with a loss of 3 cents a share for the same quarter a year ago, according to First Call.

Two others are expected to show more dramatic improvements: Excite (XCIT) is expected to report a loss of 49 cents a share, compared with a loss of 59 cents a year earlier. And Lycos (LCOS) is expected to report a loss of 3 cents a share, which narrowed from a loss of 20 cents a share last year.

But Infoseek is expected to tip slightly further into the red with a loss of 17 cents a share, compared with a loss of 14 cents last year.

Vogel said that while profitability is ultimately what these companies want to reach, each company is different with a different strategy. Therefore, some require more investments than others, such as money to build their brands or expand their services.

As these companies continue developing their brands, they are in a very unique position as a group because of what they can offer partners. Their offerings are another big area for growth area.

"On the Internet today, it is the content aggregators, not the content creators, who are attracting traffic?Advertising on [Yahoo, Infoseek, Excite, and Lycos] has become a foregone conclusion for many advertisers, and these sites are the only ones with a broad enough audience to really attract significant electronic-commerce partners," said Bruce Smith, assistant vice president at Merrill Lynch. "As the undisputed leader in the navigation space, we believe that Yahoo will get more than its fair share of this opportunity."

Each search engine has the ability to offer what very few sites on the Web can, and that is a broad viewership, from the newbie users to those that are computer savvy, and that is why advertisers are attracted to them.

"Companies are looking to hit a lot of potential customers, and pretty much everyone out there uses a search engine occasionally," said Vogel. "It is a great place to get a broad reach, and advertisers have the ability to target users by the key word they are searching for."

"Overall, it has been a good quarter and they are all winning," Williams said, adding that her analysis is one of cautious optimism. "At this stage, it is too early to say who wins and who loses. There is so much growth in the sector that everybody is growing. And the e-commerce deals don't hurt, because they bring in additional revenues and they add greater stability to the business model."