Posted on: Saturday, August 21, 2004
Search engine stocks' growth potential high
By Meg Richards
Associated Press
NEW YORK — Even with the splashy arrival of Google Inc., there aren't many publicly traded search engine stocks to choose from, and their valuations are not cheap. The growth potential for this sliver of the tech sector is huge, however, making it an attractive bet for more aggressive investors.
But buyer beware: The risks are outsized as well.
Part of the reason Wall Street is so excited about search engine stocks is it seems they are only beginning to realize their money-making potential. Slowly but surely, the Web is supplanting traditional sources of information — phone books, help wanted ads, movie listings — and becoming the place where we go to find stuff.
"This is a brave, new world, and you need to be part of it if you're an advertiser of anything," said Barry Randall, portfolio manager with U.S. Bancorp's First American Technology Fund in Minneapolis. "This is how people are going to learn about you."
Now, with paid search services like those offered by Google and Yahoo! Inc., advertisers and marketers can easily target their messages to each one of us, specifically, according to the key words we use. With paid searching, advertisers only pay for their ads on the Google and Yahoo sites if users follow their links. It's highly economical, and by tracking users who click, advertisers can directly calculate their returns.
To a marketer, this looks like a much better deal than placing ads in passive mediums, such as television, magazines, newspapers and Yellow Pages, where there's no real way to measure impact. With the Internet's unique, interactive nature, you know precisely how effective your advertising strategy has been.
Online advertising only makes up about 3 percent of total ad spending, but it is gaining market share, Randall said. Most of that gain is in paid search, which is seen as more effective and a better value than other types of online advertising, such as banner ads or pop-ups.
To get a clearer picture of what the most bullish investors on Wall Street are thinking as they snap up search engine stocks, consider this: Spending on ads in Yellow Pages totaled about $14 billion last year, while online paid search ad spending came to just $2.5 billion. That means there's an awful lot of business that could migrate to companies like Yahoo and Google in the years ahead. Smaller companies, like Mamma.com Inc., Ask Jeeves Inc. and Look-Smart Ltd. also stand to benefit.
What's less clear is which of today's search engine darlings will capitalize most on this opportunity. Do a Google search for "search engines," and you don't have to dig very deep to find the dusty Web pages of yore, detailing the heady performance of stocks like Excite, Infoseek and Lycos. If the search industry was in its infancy in the late '90s, it is merely in its toddler stage now, analysts say.
