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Tales of the Tape: AQuantive A Bet On Online Ad Market

Paula L. Stepankowsky

October 29, 2004 – Investors who want to bet on the growth of the online advertising market - but not at too high a price - may find an alternative in aQuantive Inc. (AQNT).

The Seattle company, formerly named Avenue A, is in a good position to capitalize on a new wave of online advertising that has boosted profits lately for Yahoo Inc. (YHOO) and Google Inc. (GOOG), industry watchers say. And its stock comes much cheaper than the larger Internet companies.

Based on estimated earnings for this year, aQuantive's price-to-earnings multiple is 33. Yahoo's P-E is 106, while Google's P-E is 79.

AQuantive's stock has fallen from over $70 in early 2000, a boom time for Internet stocks, to the current level of around $9. That's up from a 52-week low of $7.25 set in August. The 52-week high was $13.40 in January.

"It's a great way, other than buying Yahoo and Google, which are much more expensive, to invest in the major transformation of marketing from analog offline media to digital media," said Stewart Barry, an analyst with ThinkEquity Partners.

Mark Mahaney, an analyst from American Technology Research, said that online advertising is expected to grow by about 35% in 2004 and by about 30% in 2005, whereas the traditional "offline" ad market is growing 5% to 6% a year.

Driving the online ad recovery are brand-name advertisers, such as auto makers and banks. As the Internet grows as a source of news, information and entertainment, advertisers are forsaking TV networks and traditional newspapers in favor of online advertising.

AQuantive is taking advantage. Its revenue nearly doubled and its net income tripled in the second quarter, growth the company expects to continue as online advertising keeps getting bigger, said Brian McAndrews, chief executive.

The company expects to earn between 24 cents and 28 cents a share on revenue between $148 million and $155 million in 2004.

In 2003, aQuantive earned 17 cents a share on revenue of $64.1 million. Last year's results did not include SBI.Razorfish, which aQuantive acquired in July for $160 million, including $85 million in cash and $75 million in convertible notes, in a deal that brought it a number large clients, including Kraft Foods Inc. (KFT), Ford Motor Corp. (F) and Visa International Inc. AQuantive had some big-name clients before Razorfish such as Microsoft Corp. (MSFT), Weight Watchers International Inc. (WTW) and Best Buy Co. (BBY).

"A lot of our clients were early adopters willing to push the envelope and take risks," McAndrews said in an interview. "They are now seeing the positive results we get, so they are shifting more dollars online."

AQuantive provides full online ad agency services, including designing and placing ads as well as developing marketing campaigns. Its ad technology unit, Atlas DMT, helps clients track their online ad campaigns. The division competes with DoubleClick Inc. (DCLK).

AQuantive also competes with the online divisions of traditional advertising agencies, and will likely face more competition on that front in the future, Richard Fetyko, an analyst for Merriman Curhan Ford & Co., wrote in a recent report.

Fetyko is also concerned that aQuantive's purchase of Razorfish will affect its cost structure, margins and operating leverage - at least in the short term - although it does bring the company big new clients.

The analyst rates the stock a neutral. His compensation isn't tied to the opinions he expresses in his reports. His company makes a market in aQuantive stock.

AQuantive has also enhanced its online search-related services as more clients want targeted marketing campaigns.

Between 20% to 25% of aQuantive's billings are now associated with paid search services, McAndrews, the CEO, said, adding that the company has integrated search services into all its offerings.

"That's something our clients are clamoring for," McAndrews said.

McAndrews said the company is considering expanding its agency services beyond the U.S. International online ad markets are poised to grow even faster than the U.S. market, analysts say.

Any decision to expand overseas and will likely be made in the next 12 to 24 months, McAndrews said.

Acquisitions could be in the plan, he added. The company used a big chunk of the $147.3 million it had in cash at the end of the second quarter for its Razorfish purchase.

"If it makes sense, we would do that," he said about making acquisitions. "If not, we're open to building organically as well."