A Winner
Infoseek
252.1% Gain
(Nasdaq: SEEK)
www.infoseek.com
12/30/97 Price: 10 3/16
6/30/98 Price: 35 7/8

The Company's Biz. Infoseek. It's a search engine. It's a Web portal. Whatever we choose to call it, Infoseek is also one of the oldest companies in an industry that did not exist five years ago. Along with Excite (Nasdaq: XCIT), Lycos (Nasdaq: LCOS), and Yahoo! (Nasdaq: YHOO), Infoseek was a member of the Class of '96 search engine IPOs.

Much has changed since those ancient days, and these companies, which began as providers of rather utilitarian services for finding needles in haystacks, now find themselves at the center of a communications and business upheaval reverberating from Silicon Valley to Madison Avenue, from Hollywood & Vine to Wall Street to a desktop near you. Electronic commerce is estimated to reach between $200 billion and $300 billion over the next few years. Infoseek has consistently held a respectable piece of that growing pie, but it has also underperformed its immediate peers on key measures such as site traffic and revenue growth. As a result, its stock has also underperformed.

The Story. Infoseek is a company with a market strategy neither clear enough for Main Street nor convincing enough for Wall Street. The technology behind its main product is considered excellent, perhaps better than the competition's. This was not, however, being adequately translated into the metrics that matter. In May 1997, Harry Motro, the founder of CNN Interactive, was brought in as president and CEO, a move designed to bring marketing emphasis to a technology-oriented company in an industry where brand building is the key to all good things.

The search firms were transforming themselves, refining their customer appeal as they became broad-based online media companies. Searching the Web -- their original mission -- was becoming just one of an expanding set of integrated features. Yet "great search" remained Infoseek's main claim to fame. The company was licensing its Ultraseek Server software, leveraging this differentiating core asset to approximately 12% of revenues in the first quarter of 1998. Problem was, this technology advantage, though important, was dominating Infoseek's image and message, arguably impeding its progress in the far more critical game of capturing loyal eyeballs -- and longer-term investors.

As 1998 began, words like "laggard," or, more affectionately, "runt of the litter," had attached themselves to Infoseek. The stock was trading below its first-day's closing price, while Excite and Lycos had doubled in that period, with Yahoo! having split and tripled.

Infoseek's ascent to "Winner" status came through a series of indirect developments. In early January 1998, Netscape Communications (Nasdaq: NSCP) announced a massive overhaul of its business model, with its Netcenter website playing a more critical role. Netscape would now compete directly with Infoseek and the other services long featured on Netcenter's search page -- under contracts due to expire in April.

In the typically Alice in Wonderland logic of the online world, news of intensified competition from a former partner lifted Internet stocks as a group. In late February, Infoseek finally closed above its IPO price. A steady flow of Netscape news, often related to the "browser war" and Microsoft's (Nasdaq: MSFT) battle with the Justice Department, served to emphasize the importance and promise of the still mostly profitless online medium and its search sites, now being called "portals," in particular. This period was punctuated by a series of "copy-cat" deal announcements from the portals, which filled the gaps between major developments, of which there would be many.

When Yahoo's first quarter earnings came in at twice analyst estimates, everything "Internet" got silly. Infoseek was one of the more oxygenated revelers, more than doubling in three memorable sessions. Although it quickly gave about half of that back, the stock's level was sustained when the company beat first quarter estimates, posting a smaller-than-expected loss and 131% revenue growth over the year-ago quarter. Also helping out were published reports that Netscape was "leaning toward Infoseek" as its main partner for the great Netcenter makeover. In early May, that position went to Excite, which dropped like a rock following the news.

Infoseek, along with its portal peers and many other Internet stocks, spent several weeks recovering from April's manic partying. The company announced a number of partnerships and initiatives. It added new features to its site. And the stock happily held on to a nice portion of its recent gains, never falling below a 100% gain for the year. The roller coaster again turned upwards in early June when General Electric's (NYSE: GE) NBC unit announced it was taking a 19% equity stake in CNET's (Nasdaq: CNWK) portal service, Snap! Online, and a 4.99% stake in CNET itself. The portals had finally been acknowledged by real grownups!

Whispers of Disney (Nasdaq: DIS) making a move on Infoseek had become deafening by the time they were confirmed on June 18. In a complex deal, Disney will take an initial 43% stake in the portal. "Infoseek is Disney's portal strategy; there is no other," is how one executive Mousketeer put it. "We wanted to do a deal that would keep the entrepreneurial spirit alive, fueled by jet fuel. And I think we've done that." Not a bad endorsement.

How Could You Have Seen This Coming? Infoseek's Disney deal did not result from any particular actions taken by the company, but rather from its having been open and available for such an arrangement when Disney was ready to make its portal move. There was "bystander's luck" involved, with some of the stock's appreciation due to rumors and a swelling of positive industry sentiment. A harsh assessment, perhaps, but Infoseek's success in making the Disney connection can be seen as a result of its failure to break out from its also-ran position, which, in retrospect, might have been locked in a year or more ago.

For someone with a belief in the online medium and open to the role a current underperformer might play in the future, turning an eye toward the lagging Infoseek made sense, if not on its intrinsic merits, then as a buyout candidate. Those might not be the soundest of reasons to invest in a company; however, companies in this sector can resist conventional analysis. Quarterly results do not go back very far. Sequential comparisons are distorted by "one-time" charges for acquisitions that can alter business models, and thus future visibility. Much of what these companies do is made up as they go along, placing a premium on the quick flexibility of management. Even after careful analysis, an element of the crapshoot remains.

The Future. Many Infoseek shareholders have been disappointed with the stock's "post-Disney" performance, particularly those who had jumped on hoping to "catch a Yahoo!" or a buyout. That represents just one approach to investing, however.

Those looking longer term need to assess what it means for Infoseek to be the designated Internet strategy of the world's greatest branded entertainment and information factory. Will the runt of the litter in which it originally bought shares grow up to be a roaring online Mouse? Or is the Disney deal more like a mouse trap for Infoseek shareholders?

-Nico Detourn (TMF Nico)

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