Online Advertising is on Fire and aQuantive is Carrying the Torch

aQuantive (AQNT), through its Avenue A/Razorfish subsidiary, offers digital marketing services to help clients make the most of their online ad budgets. Among its services are online media buying and planning, ad campaign management, e-mail direct marketing, search engine optimization, and data warehousing and analysis. aQuantive's Atlas DMT unit provides marketing technology and software which allows clients to manage and track digital campaigns. Through subsidiaries such as DRIVEpm and Mediabrokers, aQuantive's third business line buys blocks of online media advertising to resell on a targeted basis.

Here's what analysts think aQuantive will do over the next 5 years: revenues to grow 22.5% a year, on average; earnings to grow 22% a year, on average. That's because online advertising is hot, and AQNT is feeling the heat in a good way.

Earnings have been positive since 2003, 3 years after the company went public. They were 17 cents when they went into the black. Now they're going to be 70 cents this year and 85 cents next year. In 2001 you could have bought all the stock you wanted for 60 cents a share. But that was after 2 years of losses and another year of loss ahead of it. Still, if you had the necessary risk profile to step in at that time, you would have been rewarded with a 4900% return. In 6 years. Of course, had you bought the stock in 2000, you could have paid $80 a share only to watch it go to $1 in the same year.

Acquisitions in the online ad sector are in the news. Last week, Yahoo bought 80% of Right Media it didn't already own. Google picked up DoubleClick, another ad placement firm and aQuantive's largest competitor, on April 14 for $3.1 billion. Microsoft is rumored to be looking for an ad network. The names most mentioned as possibilities: 24/7 Real Media (TFSM), ValueClick (VCLK) and aQuantive.

Not that you ever want to buy a stock based on rumor. But it's a fact that ad networks are being bought, and there aren't many out there large enough to be of interest to Microsoft. So let's look at the basics of AQNT to see if it has fundamental value.

The earnings are above. That puts the stock at a very rich P/E (price to earnings) ratio of 45 based on this year's earnings (projected) and 38 if 2008 is used. Certainly not a cheap stock by that measure. Return on equity is 9.5% with projections of 12% out into 2010. Current assets are almost twice current liabilities. Officers and directors own a little over 10% of the stock. FMR (a mutual fund), Mazama Capital Management and T. Rowe Price own about 27% of the outstanding shares. Debt is only 15% of capital.

aQuantiv is benefiting from new enthusiasm by advertisers to use the Internet based on new media. They can now make video ads as well as build custom looks tailored to individual customers and communities. The market is definitely growing. One analyst puts the value of online display ads at $5.5 billion. That's less than text ads related to searches which is estimated to be $8.2 billion.

One thing to consider: with Google (GOOG) buying DoubleClick, competition is going to intensify for advertisers. Google will be able to use DoubleClick's established technology and contacts to increase pressure on AQNT's market share, revenues and profits. That's the one cloud in an otherwise very blue horizon.

AQNT 1-yr chart

Disclosure: none