SAN FRANCISCO (CNN/Money) -
A pal of former Merrill Lynch Internet analyst Henry Blodget e-mailed him a few years ago to ask, "What's so interesting about GOTO except banking fees????" Blodget replied, "Nuthin."
The poor guy. Blodget's now on the hot seat for pumping worthless companies, but as it turns out, he missed one of the Internet's true success stories.
That's right. Overture Services (OVER: up $1.13 to $24.93, Research, Estimates) of Pasadena, Calif. -- formerly GoTo.com -- is one of the survivors of the dot.com age. Granted, it's no eBay (EBAY: up $0.17 to $53.68, Research, Estimates), but if you're one of the brave investors still tracking Internet firms, Overture is a company to watch. Here's why: It's making money in 2002 on Internet advertising.
Overture is the market leader in pay-for-performance Web searches. Advertisers bid on keywords that appear on Web sites that have partnered with Overture. If a company is the top bidder on the phrase "wool socks," for example, and a user searches for that term on Yahoo! (YHOO: up $0.06 to $9.76, Research, Estimates), Overture serves up that company's ad on the search results page. If the user then clicks on the ad, Overture makes money (an average of 30 cents per click, as of the second quarter of this year) and gives a percentage of that revenue to the partner site.
It's a simple strategy, but it has industry-watchers gushing like it's 1999. "There aren't many advertising companies growing over 100 percent this year," says Lanny Baker, an analyst with Salomon Smith Barney. "Overture has a fantastic model," adds Rudy Grahn, a Jupiter analyst. "It's incredibly efficient for buyers and profitable for sellers."
But don't take their word for it; look at the numbers. Overture has recorded four profitable quarters in a row, and in the first two quarters of 2002, it already has pulled in more revenues ($295.3 million) than it did all of last year ($288.1 million). Baker puts the company on track to hit $650 million this year.
The company's stock is currently trading at about $24 and has a price/earnings ratio of only 18.7 -- pretty low for its sector. On Monday, the company announced that it is renewing its partnership with MSN. The online service will feature Overture search returns alongside unsponsored results until December 2004.
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As a stock, Overture isn't for the faint of heart. It bounces up and down at a quicker clip than the William Tell Overture, in part because of speculation surrounding the status of its partnerships with companies such as CNET (CNET: up $0.02 to $1.03, Research, Estimates), Lycos, and Yahoo. When Overture loses a partner -- as it did with AOL and EarthLink (ELNK: down $0.07 to $5.14, Research, Estimates) this year -- investors get nervous. However, most of its major deals have been renewed through at least late next year.
For the future, the company is planning expansions into Europe and Asia. It's pushing up a scheduled Japan launch from early 2003 to late 2002. But these expansion plans will take time and a great deal of money.
The company also will need to keep an eye on Google, which has created a pay-for-performance product of its own. For now, Overture is a rare bird: an online advertising company that's comfortably in the black.
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