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DoubleClick: A Stock for the Doubly Patient?

By Amey Stone It's a fact of life: Even when you're anticipating bad news, it's still upsetting when it comes. That's how investors felt when DoubleClick (DCLK), the leader and surviving heir of the troubled online advertising business, reported dismal second-quarter results after the market's close on July 10. The stock, which many analysts thought didn't have much more downside, plunged $2, or 17%, on July 11 to close at $10.03.

Analysts knew DoubleClick wasn't going to be able to put much positive spin on the quarter. It lost $9.5 million, equal to $0.07 cents a share (on the nontraditional pro forma basis that Internet companies love to use these days). That was a bit better than Wall Street's dramatically lowered consensus loss estimates, but $0.04 worse than the company reported a year ago. Revenues of $101.9 million declined 20% from the same quarter a year ago. David Doft, an analyst with ABN AMRO, characterized DoubleClick's quarter this way: "As we thought -- not great."

LONG WAIT. Worse for investors may be that the company didn't offer much hope for the near future. DoubleClick provides a range of advertising-related services to both Web-site publishers and marketers that want to reach online audiences. Lately, it gets about half of its revenues from its ad-serving and tracking-software products. DoubleClick CEO Kevin Ryan said on a conference call following the release that there were no signs that the online advertising environment was picking up. "The second quarter was another difficult one for the industry," he said. "We expect that to persist until at least the fourth quarter, if not the middle of next year."

Ugh. To anyone who follows the embattled online ad industry, that sounds awfully far away. "We would've hoped for earlier," says Doft. Merrill Lynch analyst Henry Blodget was gloomier. In a July 11 research note titled "Still Getting Worse," he cut DoubleClick's revenue projections and raised his loss estimates for this year and next. "We don't believe the stock will show meaningful appreciation until the market recovers or until management cuts at least another 25% of operating costs [far deeper cuts than are planned]. At this rate, this could take a year."

DoubleClick shares had rallied to about $14 in late June after some analysts speculated that the online advertising market would soon pick up. The stock, which briefly traded as high as $135 in January, 2000, has mostly been in the low teens since October, 2000. And the weak outlook from DoubleClick is likely to cause investors to abandon the sector again, Salomon Smith Barney analyst Lanny Baker wrote in a July 11 note. Indeed, DoubleClick's stock quickly plunged more than $1 the morning after the second-quarter report and triggered more weakness in the online media sector.

"THINK CONSTRUCTIVELY." Clearly this isn't a time to be overly optimistic about DoubleClick. But investors should keep in mind that there's plenty going right at the company, and some contrarians might even find the beaten-down stock attractive at this point. "It's during these times of despair that the best investment opportunities tend to appear," Baker wrote to clients. "While we are not now becoming more positive, nor would we recommend immediate investment into DoubleClick, it is worthwhile to revisit DoubleClick's long-term potential and to think constructively about the company's earnings power."

After all, DoubleClick is clearly a survivor. Despite continued losses, management is on track to end the year with $800 million in cash, thanks to a timely secondary offering of stock. That's more than enough money to weather a protracted contraction in online advertising. It also should, at least in theory, insulate the stock from falling too much further. Given that the cash is worth $4.15 a share and thanks to the company's market-leading position, Baker thinks even with more bad news it shouldn't fall lower than $9 to $10 a share.

Meantime, management is using the weakness in the industry to build its business and gain market share. It has been buying up failing competitors at bargain-basement prices, allowing it to bulk up its service offerings. In the conference call following the earnings announcement, management emphasized its growing market share in the e-mail marketing business (thanks to its acquisitions of MessageMedia [MESG

] and FloNetworks) and its growing position in the ad-tracking business with the purchase of some assets of Sabela Media.

It's also picking off clients from weaker competitors, Ryan said. "It's really well-positioned relative to its competitors," says Wit Soundview analyst Lisa Haas, who raised the stock to buy last February.

FULL-SERVICE SHOP. Another thing to keep in mind: DoubleClick has diversified its revenues away from the pure ad biz. Once core, its online ad networks, which link marketers with Web audiences, brought in only one-third of revenues in the second quarter. Its technology division brought in $52 million in the quarter. It also has a sizable offline business: Its data division (picked up when it acquired Abacus Direct) tracks essentially all consumer purchases made from catalogs and sells research back to catalog companies. It brought in $19.3 million in revenue in the second quarter.

Doft says DoubleClick has become much more of a full-service marketing company than just an online ad firm. "How reliant is the company on a quick and full comeback of online advertising spending? Not as much as you would think."

And, while management points to mid-2002 for a recovery in online ad spending, the turnaround could well come sooner. Many analysts believe the industry has already stabilized and will rebound in the fourth quarter. The ad industry should be among the first to bounce back when the economy regains some steam, says Doft.

CLEAR BENEFICIARY. Meantime, DoubleClick is doing everything it can to persuade marketers that online advertising is effective. It recently created a research division that doesn't create much revenue yet but is an important tool for convincing marketers that they can build brands and reach consumers through the Web. If that effort succeeds, DoubleClick could see a pickup in online ad spending even if the overall economy is slow to improve.

Ultimately, when the advertising environment strengthens, DoubleClick should be a clear beneficiary. That may be several quarters away, predicts Wit Soundview's Haas, who looks for only "some trading opportunities near-term."

For long-term contrarian investors, though, a few more quarters may not be that long to wait. Despite management's diversification strategy, DoubleClick's stock still trades off the fate of online advertising. That makes it a risky buy as tough times persist -- unless you dare take a gamble on an embattled company that should do well when its industry turns around, as inevitably it will. Stone is an associate editor of BusinessWeek Online and covers the markets in our daily Street Wise column.

Questions or comments? Join in the discussion at our Ask Amey Stone interactive forum

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