Look Away, LookSmart

It's not easy being a laggard in a hot sector. Consider LookSmart (Nasdaq: LOOK  ) , which has watched its rivals in online searches soar. The company barely broke even in its December quarter but things are about to get worse.

LookSmart's undoing was the loss of Microsoft's (Nasdaq: MSFT  ) MSN.com network as a partner. Microsoft accounted for two-thirds of the company's sponsored listing revenues last year. Since MSN.com broke away from LookSmart last month, it's hard to say when the company will post another profitable quarter. It is looking to post a loss in 2004.

We took a detailed look at the entire sector in our Stocks 2004. Don't let LookSmart's woes scare you off. Industry pioneer Overture was acquired by Yahoo! (Nasdaq: YHOO  ) and was crucial to that company's bottom line last year. The other major player, Google, is gearing up to become the hottest IPO in years. Along the way, you have companies like FindWhat.com (Nasdaq: FWHT  ) and AskJeeves (Nasdaq: ASKJ  ) whose earnings have soared on the strength of paid searches.

What are paid searches exactly? Well, the next time you run a search on your portal of choice, look for the column of sponsored ads. Those companies pay the search engine for targeted traffic. Because the minimum bids are petty -- just a nickel per click on Google and a dime on Overture -- even the smallest business owner with an online presence can use paid search services to attract interested traffic.

As for LookSmart, depending so much on MSN.com doesn't look smart in retrospect. The company is looking to produce revenues between $45 million and $50 million this year. That's a significant drop from last year's $140.9 million. The company has $69.9 million in cash on its balance sheet, but that's mere pocket change when you divide it by the 109 million outstanding shares. Then again, the shares are going for pocket change, too.

As they say in the paid-search bidding business, you get what you pay for. Look into the profitable players in this growing field. That's where you'll find what you need.

Are you excited about the potential Google IPO? Are the dot-com bubble days here again? What do you think Google is worth? All this and more -- in the Initial Public Offerings discussion board. Only on Fool.com.