AmTech Research downgrades Ask Jeeves

American Technology analyst Mark Mahaney downgraded Ask Jeeves (ticker: ASKJ), soon to be acquired by IAC (ticker: IACI). Here's an extract from his note to clients:

We upgraded ASKJ on February 24th at $21.77 from a Hold to a Buy with a $30 price target. As we wrote at the time, the upgrade was mostly a trading call. We had long-standing concerns -- a near-term weak fundamentals outlook, ramping capex, and two pending investments (ISH and Europe) with uncertain outcomes. But ASKJ shares were trading down materially on a competitor's call that search had hit a "significant negative inflection point". We disagreed with that call and believed that the risk-reward for ASKJ (at 13X 2005 EBITDA) was attractive.

ASKJ shares are now up approximately 30%, mostly (18% of that 30%) due to the March 21st buy-out of ASKJ by InterActive Corp. (IACI, $22.70, Hold). Now, we have ASKJ closing in on our price target ($30), and more importantly, we have a stock that has turned into an Arb play. We don't have any reason to believe the acquisition won't go through, and we're skeptical that another bidder will emerge, so we're downgrading ASKJ from Buy to Hold. Fundamentally, a Buy call on ASKJ is now a Buy call on IACI, and we've got a Hold on IACI, so our ASKJ rating had to change at some point.

This is NOT a call on ASKJ's March quarter. We upgraded ASKJ believing there was no material risk to our March quarter estimates of $94MM in revenue of $0.34 EPS (in line with consensus). We have seen nothing to change our view on this.

Across the Internet sector, our leading Buy ideas are, in order: 1) Google (GOOG, $189, Buy), 2) Yahoo! (YHOO, $34.75, Buy), 3) Monster Worldwide (MNST, $29.03, Buy), and 4) Shopping.com (SHOP, $17.07, Buy). Our quarterly previews for the sector will be published shortly.

Chart comparing ASKJ to IACI below.