Proving that there's more than one way to skim profits off the Internet, Marchex
That compares quite favorably with rival Interchange
By now, you may be curious about what Marchex does. The company owns a few contextual pay-per-click marketing outfits, including IndustryBrains and Enhance Interactive. However, the part of Marchex that appeals to me most is the direct-navigation business.
Even though direct navigation made up just a third of the company's revenues, that part of the company's business has the most potential. Of the roughly 200,000 domain names Marchex owns, 74,000 happen to be ZIP code-dot-com (and in some cases dot-net) domains that cover 96% of the country's five-digit postal codes. There's not a whole lot of content there, but if you click on, say, 90210.com, you will be treated to basic information and a ton of ads from Yahoo!
Other winners in the portfolio with high type-in traffic include properties such as debts.com, CareerInfo.com, and hardware-update.com. Did that last one not exactly win you over? Well, it was a domain name that Inside Value pick Microsoft
If stockpiling domains that lack proprietary content and exist solely on their type-in value seems like a flimsy model, part of me agrees with you. The company is working on content-building initiatives, and that's where the long-term potential of all of this virtual real estate will really come into play. Debts.com is a good example, but so much more is possible.
Until then, the part of me that doesn't mind this light model can point to a WebSideStory study that found that 4% of the visitors to a direct navigation site wind up clicking on a revenue-generating ad. That's twice the conversion rate of the popular search sites, and even better than most standalone content sites. It makes sense: If you're lost enough to go for a type-in domain, you're likely to click on the first ad you see that seems relevant to your needs. What seems like a cheap parlor trick is actually a legitimate lead, and it is clearly effective.
For 2006, Marchex is looking to produce revenues between $125 million and 133 million. Operating profits before amortization should clock in between $33 million and $38 million. That's in sync with the company's long-term expectations of growing operating income (before amortization accounting) by 30% or more annually.
This may not be the next Google
Longtime Fool contributor Rick Munarriz does own preferred shares in Marchex, which give him a healthy dividend as he waits this growth story out. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.