I am about to propose that if Microsoft gave me $5 billion from its war chest, I could make its online venture be positioned better and maybe even profitable.

by Brenon Daly

For a company that essentially matches buyers and sellers, eBay (EBAY) has been doing a lot of dealing of its own this week. It has picked up a controlling stake in Gmarket (GMKT), the South Korean online auction house. When we wrote about this possible deal in mid-August, we noted that eBay was willing to pay a not-insignificant premium for Gmarket. Makes sense, given that international sales have been growing more than twice as fast as US sales in recent quarters. (Ebay reports first-quarter earnings next Wednesday.)

Interactive's (IACI) Barry Diller has uncanny timing. Little more than a month before October's bloodletting in the stock market began in earnest, he completed a spin off of the multiple divisions that formerly comprised the IACI conglomerate. Many of those divisions were seen as low growth and / or a drag on earnings that kept IACI from achieving the kind of valuation it deserved. This has proven to be quite fortuitous timing, as it is hard to imagine that the financing necessary to complete these spin offs could have occured if attempted this month instead.

Interactive is now in the enviable position of sitting on a cash hoard of nearly $1.6 Billion that it can use to "go shopping" for technology and content that will add to the potential of the smaller, sleeker and ready to grow Interactive.

Sorry to disappointing everyone, but the evidence today is piling up: the Internet really is a part of the overall economy. While the optimists had hoped that the efficiency of Internet-based advertising would make it a more appealing place to buy ads in a downturn, it is increasingly obvious that the current economic straits are too widespread for Internet businesses to avoid. Companies of almost every description are feeling the pain. They are cutting spending. And one thing they are trimming back on is spending on Internet advertising.

While it never made too much sense to imagine that Net companies could avoid feeling the pinch of a weaker economy, over the last 24 hours the market has received a wealth of new data points that prove the case:

ValueClick (VCLK) this morning is sending a shudder through the online advertising market.

The company warned that it now sees Q2 revenue of $163 million to $164 million, down from its previous guidance of $166 million to $170 million. VCLK, an oft-rumored takeover target that is one the largest remaining independent online advertising companies, actually raised its EPS guidance to 17-18 cents from 15-16 cents; but the top-line problem is troubling the Street.

More troubling: for the full year, VCLK cut its revenue guidance to $655 million to $675 million, from $730 million to $745 million. EPS guidance drops to 69-71 cents, from 81-83 cents.

"In recent months, the credit crunch, the subprime meltdown and the accompanying uncertain economic environment has resulted in significant losses in U.S. stock indexes," it writes, noting small-caps took the biggest hit. The firm believes now is the time to grab cheap, under-appreciated tech stocks.

One of the first stocks I owned was Ask Jeeves [formerly ASKJ, bought out by IAC/InterActiveCorp (IACI)] which I bought after the tech bubble collapsed. It was trading at a little over a dollar and the company was quickly growing revenues and earnings. I sold the stock too early but I still made over ten times my money in that stock, a ten bagger in Lynch speak.

Ever since then I have followed the internet search sector to see if another small player could follow a similar path as Ask Jeeves. I've followed the second tier search companies for a couple of years and frankly I don't think there is any money to be made investing in these companies (from a fundamental perspective).

LookSmart Ltd.'s (LOOK) board has approved a modified Dutch auction self-tender offer for up to $20 million of its common stock.

CNET (CNET) paid $20.5M for FindArticles two weeks ago and bought it from LookSmart (LOOK), who made it official last Thursday.

CNET has about $50M in cash and has set up a $250M credit facility to buy more assets I presume. They also just sold Webshots to American Greetings (AM) from some $45M.

Regardless of what you think of LookSmart's historical missteps and its recent tendency to fall short of analyst's expectations, a confluence of events the past few days leads us to believe that LookSmart (Nasdaq: LOOK) is severely undervalued and that it should command a market valuation more than double current levels.

Looksmart closed Friday at $2.35 per share, just a little higher than its 52 week low of $2.16 per share. After the close of trading Thursday, the company released Q3 results that were not particularly sterling, but did indicate that the company finished the Q with $37.4 million in cash on the balance sheet, or about $1.63 per share. The bigger news was that LookSmart also announced a contract for the sale of FindArticles.com to Cnet (Nasdaq: CNET) for $20.5 million. Adding the proceeds of this sale to its current cash hoard will result in a balance sheet with somewhere in the range of $56 - $57 million in cash, equal to about $2.45 - $2.49 per share.

In a pretty standard disclosure, Sidus did not make any direct requests on the company. The firm said they reserve the right to discuss various views and opinions with members of the company's senior management.

Wikipedia founder Jimmy Wales announced Friday that Wikia, the open-source Internet search service he is setting up to rival Google and Yahoo, has acquired the Web crawler Grub from LookSmart Ltd. Terms of the deal were not disclosed. "If we can get good quality search results, I think it will really change the balance of power from the search companies back to the publishers." Wales said. "I could be wrong about this, but it seems like a likely outcome." He is planning to launch the search engine at the end of 2007. The Wikia search service will use algorithms and human editors to deliver its results, which will be generated through Lucerne, another open-source software product. Unlike previous challengers to search giants Google and Yahoo, Wikia is already affiliated with a site with a massive audience: Wikipedia is the ninth-most visited website in the U.S. and had 47 million unique visitors in June.

Yahoo Finance show that Major Direct Holders hold some 7,441,139 between them and there hasn't been a SELL from them, since late December, 2005. In fact, they have actually "bought" in recent times.

Back in 2000, I used to work at Mamma.com (MAMA), the so-called “Mother of All Search Engines.” I worked there before the search engine industry took off, before the stock price tripled in price in one day, before Mark Cuban bought and sold his shares in the company.

Late last year, I bought a few thousands shares in the company. In January, for some odd reason, volume spiked and I sat on a nice, juicy return. I did not sell. My rationale was the company had some $25M of cash on its books, and the market cap being at $30M, it was a safe investment. Larger companies and old media firms were also looking to invest in search.

The company put on a brave face. It made all its comparisons to the immediately previous quarter instead of going back a year. For example: "Traffic acquisition costs [TAC] were within the Company's guidance range at approximately 59% of total advertising revenue in the first quarter, up from 57% in the fourth quarter of 2005." It's a nice touch, but it does leave something out.

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.

Data in table version:

Ticker	Stock	Gross Margins	Quarter Ending
GOOG	GOOGLE INC	59.6%
12/31/05
IACI	IAC/INTERACTIVECORP	47.3%
12/31/05
INFSP	INFOSPACE INC	48.6%
12/31/05
LOOK	LOOKSMART LTD	34.0%
12/31/05
MSFT	MICROSOFT CORP	81.1%
12/31/05
YHOO	YAHOO INC	61.8%
12/31/05

Data in table version:

Ticker	Stock	Revenue Growth	Quarter Ending
BIDU	BAIDU.COM, INC.	169.8%
12/31/05
GOOG	GOOGLE INC	86.0%
12/31/05
IACI	IAC/INTERACTIVECORP	45.1%
12/31/05
INSP	INFOSPACE INC	8.5%
12/31/05
LOOK	LOOKSMART LTD	-39.4%
12/31/05
MSFT	MICROSOFT CORP	9.4%
12/31/05
YHOO	YAHOO INC	39.3%
12/31/05

We do this sort of thing a lot -- adding a bit of special information to results for important searches. For example, we have movie showtimes and stock quotes. The more information we can make easily accessible with a simple search, the better.