Don't dismiss old faithful Ask Jeeves

July 22, 2003

In the interest of stating all biases right up front: Some of us have thought the butler did it for a long time now . . . and it doesn't hurt a bit that his stock is up more than 300 per cent this year. The butler in question is Ask Jeeves Inc., the user-friendly search engine that offers an intuitive approach to Web browsing.

The affection it inspires is borne at least in part through legacy -- Jeeves appeared like a beacon of reason at a time when for many the Web remained an impenetrable and incomprehensible morass. The company is named for the inimitable P.G. Wodehouse character (which invited a trademark dispute the company settled long ago) and it was one of the high fliers of the late 1990s.

But after watching the stock climb to $200 (U.S.) on excitement about the Internet's reach and potential, Ask Jeeves -- and others in its sector -- tanked. The butler had become a penny stock by last year.

But on the eve of its second quarter report, this faithful servant is worth another look. While it may be tempting to dismiss the stock -- and its huge share price increase of recent months -- as having done all the gaining it can do, there are several reasons why that might be a mistake.

Although still small relative to its giant rivals Google and Yahoo, Ask Jeeves is a respectable size, with annual sales tracking above $100-million and a healthy growth rate. By comparison, Yahoo has annual sales closer to $1-billion. But nimble Ask Jeeves has worked hard at updating its technology and refreshing the product it provides to its corporate clients for their Web sites. Meanwhile, the company is in the black, and will report its second quarterly profit in a row tomorrow, reversing steep losses from this time last year.

In the first quarter, Ask Jeeves demonstrated that its numbers are coming from all the right places. Its profit, of 7 cents a share, was driven by a 57-per-cent jump in sales. And that sales growth came from growth in users, and the rate at which Ask Jeeves made money off those users. None of this suggests the company is without challenges. For one thing, the giants in the category are fast becoming monoliths. In fact, Google is en route to becoming a verb (something that company is fighting hard to avoid since it dilutes its trademark). And the future of the search sector has been in question for some time. The money they make, by promising traffic to advertisers, could be more difficult to come by as time goes on. But it is also a sector rife with cross-pollination, and that could create opportunity.

Google itself is a major contributor to Ask Jeeves' sales, since Google drives traffic to the Ask Jeeves site through a multiyear relationship. That is expected to boost Ask Jeeves sales by up to $85-million over the next three years. More important, it opens the door for a takeover by Google. Whether or not Google makes a public offering (the subject now of much speculation), it could easily acquire the smaller Ask Jeeves. Investors could stand to benefit from that, either in Google stock, or in a takeover price with a premium to current levels. Although the current price looks high based on how low the stock has been in the past few years, it's still running at just one and a half times sales -- well below the industry average (by comparison, Yahoo's price to sales ratio is a whopping 10 times).

Evidence of consolidation is everywhere in this industry; recently Overture Services Inc. bought search engine AltaVista for more than $100-million, and just last week Overture itself was gobbled up by Yahoo in a $1.6-billion takeover agreement. A half-dozen other deals have closed, with a notable trend of existing partners making their relationship more formal. The downside of the close association with Google is that it could keep Ask Jeeves from enjoying a broader beauty contest, with deep-pocketed suitors such as Microsoft Inc. doing the judging. And there is also a question of what kind of price premium shareholders might get for their Ask Jeeves stock. After all, the shares are at a multiyear high now, and acquiring companies care little that current prices are below historical highs.

But given its trend to stronger and stronger profit, its solid credentials in the industry, as well as its well-established business relationships, analysts think Ask Jeeves is likely to command a decent price. At current price levels, Ask Jeeves becomes a matter of perspective: Relatively cheap when compared with its profit and sales, it is also at fresh highs, which will encourage some investors to believe that the opportunity to make Jeeves' acquaintance has passed. But for some of us, this may just be a relationship that has gone on too long and too faithfully to dump it now.

Story by Amanda Lang
Source: Marketing Fix

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