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Web ad stocks bounce on bullish view

By William Spain

November 11, 2003 - "We believe that online advertising expenditures could grow 20 percent or more in 2004," wrote Lanny Baker in a note to investors, "and then maintain a high-teens growth rate in 2005 as well."

That "upswing in online advertising revenue should spur accelerated cash flow growth for most online media companies, and we expect margin expansion, balance sheet improvements and valuation gains," he added.

The three companies named in the note certainly benefited from Baker's forecast. Shares of DoubleClick (DCLK: news, chart, profile), which Baker upgraded to "buy" from "sell," rose almost 10 percent to $8.51, after reaching a session high at $8.65.

Meanwhile, CNet Networks (CNET: news, chart, profile) added almost 8 percent to $6.97 and Yahoo (YHOO: news, chart, profile) rose 3.3 percent to $39.27.

AQuantive (AQNT: news, chart, profile), another online advertising company, also rose by 4.4 percent, reaching $9.96.

Baker cited a current "stampede" in paid search advertising and said "more traditional forms of online advertising are ready to break from a trot to a gallop as well."

He noted that "all manner of mega-brands" are increasing their spending in the medium on "improved measurability and more compelling creative executions," leading to an expansion of the advertiser base.

Coupled with the increasing popularity of broadband and the shakeout of Web sites, the ad upturn can support bullish investments in online media companies, Baker said.

There is some supporting evidence for Baker's thesis. A few weeks back, the Interactive Advertising Bureau said that domestic Internet ad revenue in the first half of 2003 came in at $3.29 billion, up 10.5 percent from the first six months of 2002. In late August, TNS Media Intelligence estimated a slightly lower figure but forecast a growth rate of better than 15 percent.

Looking ahead, ad-tracker Jack Myers recently predicted that traditional online advertising would climb 14.3 percent to $4 billion this year and then another 20 percent to $4.8 billion in 2004. Last summer, Interpublic Group (IPG: news, chart, profile) forecaster Bob Coen said he was expecting growth to be up 5 percent to $5 billion this year.

While the overall spending number is impossible to calculate with any degree of precision, the trend lines from the various trackers are getting in step with each other -- and revenues at the major players have largely been on the rise.

Second opinion
On the other hand, a note from Bear Stearns analyst Alexia Quadrani took a rather more cautious view.

In running down the ad prospects for various media, Quadrani wrote that "while there has been a slight pickup in demand for the Internet, it is still viewed by most advertisers as more of a distribution vehicle than a medium."

Further, "in its current form, it may not be effective for branding, but rather for information gathering and targeted advertising for industries such as tech and auto and is not expected to gain any significant market share over the next few years," she said.

William Spain is a reporter for CBS.MarketWatch.com in Chicago.

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