It's finally here: the time of year when folks like to take a look back at the year that was or make predictions about the year ahead.
If you're like me, looking back is like slicing open old wounds. So I'm going to spend the next few weeks discussing investing opportunities for 2009. I'll select some of the sectors that I follow, and then go out on a limb and predict next year's biggest winners.
I'll kick this off by taking a look at search engines.
The state of search
There were 7.8 billion searches performed in this country in October, according to Nielsen Online. That is a surprising 2% decline compared to last October's throughput. Combine that grim stat with the sorry state of marketing budgets in this sluggish economy and this doesn't seem to be the industry's finest hour.
Thankfully, not all search engines are the same. Let's dig deeper into the Nielsen data.
October 2008 |
Market Share |
YOY Gain/(Loss) |
---|---|---|
|
61.2% |
8.1% |
Yahoo! |
16.9% |
(12.0%) |
MSN/Windows Live |
11.4% |
(19.0%) |
AOL |
4.3% |
14.5% |
Ask.com |
2.3% |
(22.9%) |
Source: Nielsen Online MegaView Search.
Everyone knows that Google
This leaves us with IAC's
And the winner is: Google
How can one bet against Google at this point? It's widening the gap between itself and its two largest competitors. Analysts have been lowering their profit targets on the company -- and understandably so, given the softening ad market -- but the stock price has plummeted even more.
Google closed yesterday at just 14 times this year's projected profitability, and a mere 12 times next year's target. Admit it. You never thought that Google would get this cheap. When media markets bounce back, it will be the companies that gained market share during the lull -- like Google -- that truly spring back into life.
First runner-up: Baidu.com
You didn't think I would limit myself to just the stateside players, did you? Baidu.com
Unfortunately, the reason that Baidu is trading with a forward P/E in the teens for the first time since going public three years ago is not pretty. The company got called out for accepting ads from unlicensed medical sponsors, a seemingly thin niche that makes up a troublesome 10% to 15% of total revenue at Baidu.
Baidu is doing its best to clean up its act, but this could be a double-whammy if it costs the company advertisers in the near term and integrity-seeking searchers in the long run. The warts are clearly there, but it's hard to ignore the huge upside potential here if Baidu gets it right.
For those troubled by Baidu's hiccups, a great alternative would be Sohu.com
Second runner-up: Yahoo!
Yes, Yahoo!. At this price, it's hard to pass on the industry's distant silver medalist. Just consider the potential catalysts that may move shares of Yahoo! higher:
- The CEO hunt to replace Jerry Yang may nab a magnetic outsider.
- Microsoft has made it clear that it's not interested in renewing buyout talks, but it's hard to see how Microsoft can take on Google without Yahoo!.
- Yahoo! has several Asian investments that may bounce back into favor even if Yahoo! itself remains stagnant.
No one needs to tell me that Yahoo! is broken and a laggard. I know it. However, as long as it remains a profitable and somewhat relevant player, the upside is so much greater than the downside.
So that's it! That's how I see search engine stocks stacking up in 2009. I'll be back with more sectors over the next few days.
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