LookSmart, Look For A Viable Business (LOOK)

| About: LookSmart Group, (LKST)

LookSmart (NASD:LOOK), the search engine company, has made a big move this year from $2.75 to $5.50. It's hard to figure out why.

LookSmart's revenue has dropped every year for the past three years, and its quarterly numbers for 2005 didn't move much. The first quarter revenue was slightly above $12 million and Q4 05 was just below $10 million. The company showed an operating loss in excess of $4 million in each quarter of the year.

LookSmart guided to a meager 3% to 5% sequential growth for Q1 06.

LookSmart is no longer just in search per se. They have 181 search sites in 18 vertical categories. In addition, they supply tools that, in their words, are a "comprehensive and customizable set of syndicated solutions for publishers to grow their advertiser relationships and audience". In essence, the company offers tools, their AdCenter and Furl.net products, that allow other internet publishers to get better results from search and targeted advertising.

LookSmart has $51 million is cash and equivalents, so they have some time to see if their "tools" model will work. But, the company has two huge hurdles. First, search is dominated by Yahoo! (NASD:YHOO), Google (NASD:GOOG), and MSN. Barry Diller just might get into the game in a big way with Ask.com, but even that will be very tough.

The same holds true of the online ad tools business. Google offers tools and MSN is moving into this game. A number of the online advertising resellers like 24/7 Real Media (NASD:TFSM) offer them. It's very hard to see how this is a winning game for a small player they does not have a sharply differentiated product. And, I mean very sharply differentiated.

The run-up in the LookSmart stock does not seem justified. They may show something in 2006 to prove they have a viable business, but it has not happened yet.

LOOK 1-yr Chart

Douglas A. McIntyre is the former Editor-in-Chief and Publisher of Financial World Magazine which was on the Adweek 10 Hottest Magazines in two separate years. He has also been president of Switchboard.com when it was the 10th most visited site on the internet, according to MediaMetrix. He has been chief executive of FutureSource, LLC and On2 Technologies, Inc. and has served on the board of TheStreet.com and Edgar Online. He does not own securities in the companies he writes about.