NEW YORK (CNN/Money) -
It's been a very good year for online search stocks. But will Google change that once it files for its eagerly awaited initial public offering?
Google is widely expected to register for an IPO by the end of this week. And that has Wall Street wondering whether a publicly traded Google will be a boon for companies like Yahoo! and Ask Jeeves -- or a curse.
"Does Google generate more excitement for Internet stocks or does it divert investor money from existing publicly traded companies? That's the debate," said Marianne Wolk, an analyst with Susquehanna Financial Group.
The Google speculation has added to the state of euphoria surrounding search stocks this year. There has been an explosion in demand for search-based advertising, which allows companies to target ads based on specific keyword searches, a more effective way of marketing than banners and pop-ups.
Why buy Mamma.com when there's Google?
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 Internet search engine Google is expected to announce plans for an initial public offering as early as this week. It would be the most highly anticipated stock sale in the post-dot.com era. CNNfn's Allan Chernoff reports on the potential for an investment feeding frenzy.
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Shares of Ask Jeeves (ASKJ: Research, Estimates) gained more than 6.5 percent Monday and the stock is up 143 percent year-to-date. Another small search company, LookSmart (LOOK: Research, Estimates), gained 6 percent Monday and its shares have shot up nearly 66 percent this year. And then there's Mamma.com (MAMA: Research, Estimates), a company with no analyst coverage. This stock is up an astonishing 368 percent in 2004.
But some market watchers think Google's eventual IPO announcement may have a negative impact on these second and third-tier search names. That's because even though these companies should post strong results this year, the amount of revenues and profits that Google is expected to disclose in its IPO filing could make the smaller companies look fairly weak.
Google has been tight-lipped about its finances, which is one reason why the market is so eager to see its IPO statement. Industry observers have speculated that the company is extremely profitable and that revenues last year were at least $1 billion.
By way of comparison, Ask Jeeves is expected to post sales of $252.4 million this year while LookSmart's revenue estimates are pegged at just $55.4 million. LookSmart is not expected to post a profit either.
| All data as of 4/26/04. * LookSmart is expected to post a loss this year. **There are no estimates available for Mamma.com | | Source: Thomson/Baseline |
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"My general sense is that Google hurts the small guys. Obviously, the numbers at Google are going to be very impressive," said Ethan McAfee, director of investment research for hedge fund firm Capital Crossover Partners, which does not have a position in any of the stocks.
Some analysts think that even Yahoo! (YHOO: Research, Estimates), which is expected to report sales of $2.5 billion and earnings of 64 cents a share this year, could wind up looking pedestrian compared to Google.
"There will probably be some rotation from Yahoo! into Google," said Steven Tuen, co-manager of the Kinetics Internet fund. "Investors have the perspective that you need to own the highest quality names in the sector. It's not that Yahoo! isn't a high quality name, but Google is seen as the cream of the crop."
Could be a tougher competitor after an IPO
To compete further with Yahoo!, Google recently entered the local search and comparison shopping markets, and has introduced a beta version of a controversial e-mail service called Gmail.
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The email service offers far more free storage space than Yahoo! Google has said it intends to sell ads that will be tied to keywords in e-mails, which has raised some privacy concerns.
For now, Wolk said, there appears to be such strong demand broadly for search-based advertising that all companies are benefiting. But that won't always be the case.
Longer term, Wolk thinks a Google IPO could make the already competitive online advertising business even tougher, as the company will be flush with cash that it could use for further expansion internationally.
What's more, Google probably would avoid the mistake that many dot-coms made during the late 1990s boom: spending too aggressively on brand-building campaigns.
Google is in the position it is right now without ever having spent millions on a Super Bowl ad or any major media marketing. It's mainly been word of mouth.
With that in mind, Google could use a large portion of IPO proceeds on research and development in order to widen what analysts say is already a formidable technological edge over rivals such as Yahoo and Microsoft's MSN.
"A Google IPO will make it tougher for the Yahoo!s and MSNs in search," said Arnie Beman, chief investment officer of Technology Focus Associates, an independent tech research firm catering to institutions. "Google is the gorilla with the best technology. Everybody else is a chimp."
Tuen said he does not own any online search companies. He's concerned about increasing competition as well as rich valuations. Yahoo! trades at nearly 90 times 2004 earnings estimates, for example. But he said Google will definitely merit a look once it does start trading.
"Google is in a class all by itself," said Tuen.
Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties to the companies.
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