A Look at Three Internet Advertising Players (GOOG, VCLK, AQNT)

There are many more players than these three, some quite large (Yahoo!, Microsoft), and other's not, but these are on our radar, and merit an update. We've discussed them previously, so we will just do an update here:

* Google (GOOG)- stock price target upgraded to between $450-$2000 by investment bank analysts, followed promptly by disappointing numbers and a ca. $80 price drop, followed by speculators filling the gap, followed by yesterday's announcement by the CFO that their easy growth is done. The romance phase is over. We don't see anything that they have done other than AdSense as being financially meaningful, so we think they may be beginning a major downturn.

* ValueClick (VCLK) - presented Q4 and FY 2005 numbers Monday, and a compelling IR document (.pdf) yesterday. Q4: revenue up 43% Q/Q ($116.6M/$81.4M), operating earnings up 30% Q/Q ($23.1M/$17.8M), for an OP margin of 20% ($23.1M/$116.6M). Gross profit of $77.3M, giving an OOP margin of 30%($23.1/$77.3M). Net income up 23% Q/Q ($13.5M/$11.0M), but flat on an EPS basis due to dilution. For 2005 they have a trailing P/E of 40 ($17.50/$0.44), and an annual top line growth rate of about 80%, which seems to have accelerated in the fourth quarter. Their growth model is still linear, with high margins, and high top line growth.The stock has been flat for a bit now, which we have taken as a buying opportunity.

* aQuantive (AQNT) - Q4 & FY 2005 numbers two weeks ago. Q4: revenue up 11% Q/Q ($87.5M/$78.7M), operating earnings up 33% Q/Q ($20.9M/$15.7M) for an OP margin of 24% ($20.9M/$87.5M). Gross profit of $38.6M, giving an OOP margin of 54% ($20.9M/$38.6M). For 2005 they had an operating EPS of $0.80 ($60.981M/76.516M shares), which at a current share price of $27.00 gives a trailing operating P/E of 34, which is nearly unchanged from our previous calculation. With FY top line growth of about 95% ($308M/$158M), steady gross margins of about 42%, and OP margins increasing from 17% to 20% ($26.5M/$158M and $60.98M/$308M), and OOP margins increasing from 39% to 47%($26.5M/$68.45M and $60.98M/$129.6M), they had a great 2005. We're still ambivalent, since their model still does not strike us as particularly unique, although they are executing well.

[Disclosure: as of this writing, author is long VCLK]