Industry on Online advertising

Whether you like the earnings report from Google Inc. (NASDAQ: GOOG) or not, there are some key takeaways using the same metrics that Google uses at other internet stocks and online media stocks. Baidu, Inc. (NASDAQ: BIDU) has the most direct comparison of all, particularly as everyone calls Baidu “the Chinese equivalent of Google.” We won’t call it a knock-off, but we’ll leave it at that. Yahoo Inc. (NASDAQ: YHOO) is on deck with earnings next week, and the metrics there have many direct and related metrics compared to Google. Then there is the IAC/InterActiveCorp. (NASDAQ: IACI) further down the list with the Ask.com ties. On the standalone ad metrics, we would show ValueClick Inc. (NASDAQ: VCLK), and lastly we want to address the much much smaller Local.com Corp. (NASDAQ: LOCM). There are many other media and online companies, but we are looking for the direct pure-plays in this so we are not comparing apples to oranges or tennis balls.

The top metrics at Google were as follows:

• Traffic Acquisition Costs, or revenues shared with Google’s partners, were $1.45 billion, similar to $1.44 billion last quarter. TAC as a percentage of advertising revenues was 27%, same as in the first quarter of 2009 and in the fourth quarter of 2008.
• Paid click growth was up 15% over a year ago, but was DOWN 2% sequentially.
• Google’s headcount was down again from 20,164 to 19,786 full-time global employees.

Yahoo! (NASDAQ: YHOO) reports on Tuesday, July 21. We won’t bother telling you the differences between this one and Google. But there is an interesting development in the stock. This one has been in a $15 to $16.75 trading range since early May. This is based upon the hope of a Microsoft pact is coming and on the changes that Carol Bartz is making. Earnings estimates are $0.08 EPS and $1.14 billion in revenues, and there has been very little change in the estimates of late. If we compare some of the same data in the Google metrics then we would come up with a slightly better than expected to less-bad earnings and revenue report. The obvious caveat here is going to be “charges” that came about from restructuring during Q2. Be advised, if no Microsoft deal comes then there is much room for air to come out of this one. Shares are close to $16.70 today, and it was just July 9 when shares went as low as $14.25.

Baidu, Inc. (BIDU) reports on Thursday, July 23. This one is looking like a champ on the charts as far as support on the downside if there is a disappointment. But it also looks like it has buyer exhaustion just like Google did before the report. Estimates on Baidu are $1.43 EPS and $156.58 million in revenues. Despite a better GDP in China, there have been no real changes to the expectations here of late. With the $11.1 billion market cap and expected 2009 earnings multiple of 55, we always have to say ‘watch the valuations.” The good news is that the street is still expecting roughly 40% earnings and revenue growth in 2010.

IAC/InterActiveCorp. (IACI) is still two weeks out and reports on Wednesday, July 29. Estimates are $0.09 EPS and $334.6 million in revenues. Barry Diller’s online media and specialty online destination conglomerate includes Ask.com, Excite, Bloglines, Match.com, People Media, and a couple dozen other online media or specialty web destination properties. We see IACI as the biggest possible wild card for all of the media properties in earnings season. IACI is actually just above what was the high-end of its recent trading band around $16.80. With where the 50-day moving average is ($16.02), this one should have major support around that $16.00 if there is a disappointment. On a post-break-up basis the 52-week low is $13.23. With an implied $2.5 billion market cap, the expected multiples for FY-2009 end are 40-times earnings and 1.8-times revenues.

Local.com Corp. (LOCM) already raised guidance and took its shares higher. Comparing Local.com to any of these huge properties is a stretch. But this company’s local search is in the sweet spot from what we have heard from IAC, Google, AOL, and others. It is hard to know if the company is a willing seller, but this one could easily turn into takeover bait if management and/or recent investors were interested. Based on this one now being non-GAAP profitable and a $58 million implied market cap (may be different after financings) this one would be easy for any large player to acquire even at a substantial premium.

ValueClick Inc. (NASDAQ: VCLK) has perhaps the biggest opportunity out there as it is sort of the last man standing in the pure online advertising solutions. Google was not exactly conveying the message that there is a huge improvement yet in online ad rates. But our own checks in and out of Google-tied advertising shows that ad rates have not just stopped going down. They are still down considerably from the peak, but they have recovered handily from the lows on a CPM basis and on a performance basis. This won’t translate to a homerun quarter at ValueClick for Q2, but if things stay static or continue to improve even marginally then it gives a huge opportunity in Q3 and Q4. With a $4.66 to $14.00 range over the last year and a $11.30 area today, we think the company cannot be muted or show much weakness in the business. This one just crossed its 50-day moving average on Wednesday, and if the business is not stabilized or strengthening then we’d look for a retest of that level ($10.79 today). The $982 million market cap is less than two-times expected earnings.

As far as how all of these compare, Google trades at an implied forward value for 2009 of 20.4-times earnings and 8-times revenues.

We will be doing much more detailed reviews for the key players on an individual basis. These estimates are likely to change by next week, and information on the charts and moving averages will change each day.
JON C. OGGJULY 17, 2009