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Why Little Search Engines Can't

There's an old adage that a rising tide lifts all boats. But in the search industry, where the tides have been rising like crazy, the biggest boats are rising a lot faster than the smaller ones.

Ad spending on the Internet has been booming for the past year, and the fastest growth has been coming from search-related ads of the kind found among engines such as Google (GOOG - Get Report) and Yahoo! (YHOO - Get Report).

Google's revenue, which is nearly entirely generated from search-related advertising, grew 93% in its latest quarter, while Yahoo!'s revenue, a mix of search and branded ads, grew 55%.

After the two big search engines reported first-quarter earnings, their stocks rallied. Over the past few weeks, Google has risen 27% and Yahoo! 12%. But smaller companies competing in the search space aren't doing as well.

LookSmart (LOOK - Get Report) is down 69%, FindWhat (FWHT) is down 73%, ValueClick (VCLK) is down 29% and Mamma.com (MAMA) is down 55%. Moreover, none of these stocks benefited from spillover rallies on Google's and Yahoo!'s stellar results.

What's odd about the lackluster performance of smaller search companies is that their revenues are growing fast. Until recently, none of them has been perceived to be the victims of Google and Yahoo!. Although many news stories have noted radio and newspaper stocks coming under selling pressure amid signs that the Internet is sapping away some of their ad business, small search companies have performed even worse.

"The market's big enough that a number of players can benefit from it now," says Aaron Kessler, an analyst at Piper Jaffray, which does banking with Google but not Yahoo!. "The interesting thing is it appears it's already turning into a two-horse race. It looks like Google and Yahoo! will continue to outperform and the second- and third-tier players will continue to underperform."

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SYM TRADE IT LAST %CHG
VCLK $0.00 0.00%
AMZN $423.04 0.00%
GOOG $540.78 0.00%
LOOK $1.40 0.00%
MSFT $48.24 0.00%

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S&P 500 2,114.49 +6.20 0.29%
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