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'Search, Hot' Query Yields Two Results

By James Altucher
RealMoney.com Contributor
3/31/2005 1:10 PM EST
Click here for more stories by James Altucher

Internet Stocks
FindWhat and CGI Holding are two promising small-caps in the burgeoning Internet search business.
Expect a big year from FindWhat. Its cash holdings and strong growth provide a safety cushion.
CGI is a riskier proposition, but growth and keyword price trends bode well for the stock.






In the mid-1990s, I started a company with my brother-in-law to help Fortune 100 companies, particularly entertainment companies, build their Web sites. We built sites for HBO, Warner Brothers' film The Matrix, New Line Cinema, BMG, Sony and Universal.

In early 1999 the industry changed because so many startups were getting massive venture capital funding. Our prices went up (the customers were not price-sensitive) and massive ad campaigns began. We helped companies build and place their banner ads.

Unfortunately, these ad campaigns did not work and the companies that sprung up to build banner-ad networks ended up stagnating or going out of business: Engage Technologies (bankrupt), Twenty-Four Seven (a penny stock) and DoubleClick (DCLK:Nasdaq - commentary - research), which has finally found its ground and may now be an interesting stock to look at, although it's not the topic of this article.

Search Growth Surging
Instead, I wish we had focused for our clients on an area that few focused on then: search engine marketing campaigns. This is the fastest-growing area of online media, growing 31% year over year.

Right now there's a battle between the larger marketers such as eBay (EBAY:Nasdaq - commentary - research), IAC/InterActiveCorp (IACI:Nasdaq - commentary - research), etc. and the search engines about keyword inflation. The cost of buying a keyword on a search engine is doubling and tripling each year, pushing up costs for the online commerce companies. For instance, if a company buys the word "mortgage," it pays a price -- say, $11 -- whenever someone searches using that keyword, then clicks on the company's ad that shows up on the right side of Google's search results page.

I like two companies in this space right now. One provides the infrastructure to search engines to help them structure and charge for keyword-based marketing campaigns. The other helps companies optimize their search engine marketing campaigns.

'Search, Hot' Query Yields Two Results
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FindWhat

FindWhat (FWHT:Nasdaq - commentary - research) allows companies to design a one-size-fits-all search-engine marketing campaign that it then distributes to many of the leading search engines.

Say, for instance, that a company will pay only $5 per click for the keyword "dating." FindWhat then arranges that with the dozens of search engines it has relationships with; examples include Excite and Microsoft Internet Search. This is very similar to how DoubleClick aggregates banner-ad spots across hundreds of Web sites and then places your ads across its network. What DoubleClick did for banner ads, FindWhat does for search engines. As long as search-engine marketing proves effective, this company will continue to grow, regardless of the battle over keyword-pricing inflation.

FindWhat's metrics include a $310 million market capitalization, $54 million in cash with just $6 million in debt, and $20 million in cash generated from operations. Net income increased 45% year over year. Even if you assume no growth (an incorrect assumption based on the 100%-plus year-over-year top-line growth), the company now has an enterprise value-to-cash-flow multiple of just 13. Top-line revenue grew from $72 million to $169 million year over year in the 12 months ending Dec. 31, 2004.

The cash in the bank, the cash generated from operations, the growth of the company, and the growth of the industry give lots of safety cushions for this stock. It is in the $10s now and I think it will see $20 before year-end.

'Search, Hot' Query Yields Two Results
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CGI Holding

The other company I like here is much more speculative. CGI Holding (THK:Amex - commentary - research) helps companies optimize their search-engine campaigns by trying to improve their placement on search-engine results. If you're a dating site and you want your site to show up as one of the top 20 results when someone searches "dating," you call CGI.

I think this is speculative but worth following because with keywords so expensive, the CGIs of the world will be in demand to improve companies' standing on search results, without the company being forced to pay exorbitant amounts for keywords. Revenue grew from $4.4 million to $14.1 million in the nine months ending Sept. 30, 2004, and net income went from $2.2 million to $277,000. With a market cap of just $130 million, though, and only a few million in cash in the bank, CGI has a few more hurdles to jump through before it fully matures.

That said, I'm keeping an eye on it because I like the growth, and with my experience in a similar area of business a long time ago, I definitely see a need for the company's services.