This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

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 - Get Report) 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 an inexorably rising percentage of its revenue on traffic acquisition costs. They argue that this trend will ultimately keep the company from meeting the aggressive profit projections that bulls bandy about.


Pulling Back
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.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
YHOO $43.48 0.00%
AAPL $132.54 0.00%
FB $80.54 0.00%
GOOG $540.11 0.00%
TSLA $247.73 0.00%

Markets

DOW 18,232.02 -53.72 -0.29%
S&P 500 2,126.06 -4.76 -0.22%
NASDAQ 5,089.3620 -1.4320 -0.03%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs