The Best Stock for Paid Search

If I asked you to name what first comes to mind when I say "paid search," chances are you'll say Google (NASDAQ:GOOG).

That's probably as it should be. Although it was Overture -- now a subsidiary of Yahoo! (NASDAQ:YHOO) -- that invented the idea of mixing ads with search results, it's Big Goo that today controls 25% of all digital advertising. And researcher eMarketer says that Google's share will grow to 32.1% by the end of 2007.

Meanwhile, the search king's first-quarter earnings report -- boasting better than 60% gains on both the top and bottom lines -- brought forth visions of a gold rush in the making.

Yet when asked, the professional and amateur stock pickers rating the stock in our Motley Fool CAPS investor-intelligence database rank Google's stock as one of the least attractive in the paid-search industry:

A thriller from Diller?
Maybe it's the geek factor. Google co-founders Sergey Brin and Larry Page look to me as though they'd rather be on the set of Romper Room than in the boardroom. Same with billionaire Yahooligans Jerry Yang and David Filo.

Then there's Bill Gates. A fat wallet is good for only one blow in a real backyard scrap. Without it, my cat could take him. CEO Steve Ballmer, meanwhile, sports a menacing look but might sweat to death before the first punch is thrown.

Which brings me to top-ranked IAC/InterActiveCorp and its CEO, Barry Diller. Say what you will about his legendary bluster, but he's the only executive from this group who could answer a casting call for The Sopranos and not get laughed out of the room.

Cashing in on the Web
He's also proved to be a shrewd dealmaker with an interesting vision for how to leverage a mixture of seemingly unrelated Web properties, argues CAPS All-Star weiwentg:

IAC/InterActive owns many choice Internet properties. Their individual businesses have attractive network effects, and IAC is moving to integrate the businesses, for example by placing an Ask.com search box in each of its sites. Their businesses generate a great deal of cash, because they are usually dominant in their individual fields. Lendingtree and Ticketmaster are particularly healthy. This is, incidentally, the same company that spun off Expedia (NASDAQ:EXPE). [Emphasis mine.]

Cash may, indeed, be the best part of this story. IAC's digital digs created nearly $570 million in free cash flow during 2006 -- easily exceeding net income and enough to help Diller buy back roughly $1 billion worth of IAC shares. And the balance sheet remains strong with $1.3 billion in net cash and investments still on the books.

One Fool's view
Is that really enough to trump Google? No, not by itself. Google generates a huge wad of cash, too. The difference here is that, at 21 times its 2006 free cash flow per share, IAC's stock sells for a reasonable premium.

Google, on the other hand, trades for 82 times its trailing FCF per share. That will prove justified if Big Goo continues to grow at 60% or better. But as its CAPS rating asserts, the odds favor IAC, which could provide huge returns if it manages a burst of 20% growth in free cash flow.

Don't be surprised if that occurs. One-third of the U.S. population reportedly visits one of IAC's collections of digital properties -- the sixth largest on the Web -- at least once a month. So long as they keep coming back, the cash will follow.

Bada-bing!

Cap off your day with related Foolishness:

• Maybe it's time you got to know a guru.
• Get ready for the bounce.

Fool contributor Tim Beyers, who is ranked 3,255 out of more than 27,800 in CAPS, didn't own shares in any of the companies mentioned in this article at the time of publication. All of his portfolio holdings can be found at his Fool profile. His thoughts on Foolishness and investing may be found in his blog. Microsoft is an Inside Value pick. Baidu is a Rule Breakers recommendation. Yahoo! is a Stock Advisor selection. The Motley Fool's disclosure policy would like to get paid to search for a pair of comfortable shoes. Any takers?