Creeping Costs Put Overture Under the Gun
An ostensibly positive preannouncement that looked negative to Wall Street sent Overture Services' (OVER) stock down as much as 13% Tuesday.
Overture, operator of a pay-per-click search engine used by Yahoo! (YHOO) and other online properties, said revenue for the fourth quarter ended Dec. 31 will be nearly $200 million, surpassing the $190 million figure the company had previously forecast.
Unfortunately for Overture, which is slated to report full results Feb. 6, investors focused instead on another figure in Overture's Monday night release: the percentage of fourth-quarter revenue that Overture paid to companies for placing the search engine on their sites. Instead of paying the forecast 61% of revenue for what Overture calls "traffic acquisition costs," Overture paid 62%.
That increase, though slight, corresponds to what is probably the strongest bearish critique of Overture. Despite the company's revenue and income growth in what is otherwise a difficult environment for online advertising, short-sellers argue that Overture will have to spend
Overture suffers a setback
Aligned with this argument, SoundView Technology Group analyst Jordan Rohan cut his rating on Overture Tuesday morning from neutral to underperform. Rohan's price target for Overture, which he raised from $26 to $31 a week ago, dropped to $29. SoundView hasn't done banking for the company. Shares in Overture were trading at $28.25 near midday Tuesday, down $2.79, or 9%. In his Tuesday note, Rohan said Overture's deal with Yahoo! appeared to be at the heart of Monday's announcement. While the volume of usage on Yahoo! seemed to drive revenue higher, the specific revenue-sharing terms with Yahoo! are also cutting into Overture's bottom line, said Rohan. He estimated Yahoo! gets at least 70% of Overture's Yahoo!-driven advertising revenue. Though Overture has said traffic acquisition costs will be in the 61%-63% range for 2003, Rohan says he believes the company will nudge that range higher, and that those costs could amount to 65% to 66% in 2004.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV