Technology > Tech Biz
Buy Jeeves? No, sir.
Search engine is one of the best performing stocks of the year. It's due for a pullback.
September 16, 2003: 12:33 PM EDT
By Paul R. La Monica, CNN/Money Senior Writer

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NEW YORK (CNN/Money) - Remember Ask Jeeves, the quirky search engine with the butler from the P.G. Wodehouse stories as its corporate logo? Like many Internet stocks, investors left this one for dead following the blowup.

Shares were trading for less than a buck last October -- a far cry from its peak price of $144 back in December 1999 -- raising the ugly possibility of being delisted from the Nasdaq.

But Ask Jeeves (ASKJ: Research, Estimates) is back with a vengeance this year. Shares are up 725 percent year to date and have soared more than 2,100 percent since bottoming almost a year ago.

Can you say irrational exuberance, kids? (Seems fitting to trot that one out on a day when Fed Chairman Alan Greenspan is the main news event.)

The butler did it

Yes, Ask Jeeves' fundamentals have improved dramatically. The company, known for its question-and-answer search model, reported its first quarterly profit in the fourth quarter of 2002, and has followed that up with two more profitable quarters so far this year.

Search engines have enjoyed a comeback as of late, thanks to so-called sponsored searches, which gives advertisers the ability to have ads tied to specific keywords. Ask Jeeves is expected to earn 33 cents a share this year after a 37-cent-per-share loss in 2002, and profit is expected to increase nearly 40 percent in 2004.

But the stock trades at 46 times 2004 earnings estimates, which seems a bit rich even though earnings are expected to increase by 24.5 percent annually for the next three-to-five years.

"The company is clearly operating in a really attractive market right now, but the valuation fully recognizes that," said Derek Brown, an analyst with Pacific Growth Equities.

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That's attracted the interest of short sellers, which should be a cause for concern since they are betting that the stock will go down. Short interest has increased from just about 65,000 shares as of mid-December to 6.8 million as of mid-August. Nearly 18 percent of the float, or available shares outstanding, are being held short.

Ethan McAfee, a technology analyst with hedge fund firm Capital Crossover Partners, which has no position in the stock, said investors are ignoring several longer-term risks that could come back to haunt them.

Searching for traffic

For one, Ask Jeeves' newfound success is really more a tribute to the strength of privately held Google than anything else. Even though Ask Jeeves has won raves for improving the site's search functionality (mainly due to its 2001 acquisition of Teoma), nearly half of Ask Jeeves' revenue in the second quarter came from a paid placement partnership with Google.

According to Ask Jeeves' most recent quarterly filing with the SEC, the partnership is scheduled to terminate in September 2005, but both companies have the right to terminate it as early as September 2004.

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Written by: Paul R. La Monica

And it would appear that Ask Jeeves needs Google more than Google needs it, considering that Google had nearly 4 times the traffic that Ask Jeeves had in August, according to online research firm Media Metrix. In addition, traffic at Ask Jeeves declined 8 percent during June and another 8 percent in July before picking up slightly in August.

"Ask Jeeves is continuing to struggle to get traffic. The perception is that Ask Jeeves is for Internet newbies and Ask Jeeves needs to get rid of that image," said Gary Stein, an analyst with Jupiter Research.

With this in mind, Ask Jeeves has initiated a new marketing campaign to position itself as a more serious search choice. The friendly butler is conspicuously absent from these ads.

But despite these efforts, McAfee said that the search engine market would likely be whittled down to three major leaders during the next few years: Yahoo! (YHOO: Research, Estimates), Google, and Microsoft (MSFT: Research, Estimates).

Of course, speculation about how the search engine business will look in the next few years is another reason why Ask Jeeves stock has shot up so dramatically.

Yahoo! agreed to buy paid placement search provider Overture Services in July. And Microsoft has been making noise about investing more heavily in search engine technology. Brown said that there appears to be some takeover froth in Ask Jeeves' stock. But a takeover seems unlikely given Yahoo!'s move and Microsoft's general unwillingness to make high-profile acquisitions.

That means that Ask Jeeves is at best a second-tier name in the search engine business fighting against three titans. That's better than being a third-tier business (or out of business for that matter), but it's not justification for the kind of run the stock has enjoyed this year.

Analysts quoted in this story do not own shares of Ask Jeeves and their firms have no investment banking relationships with the company.

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