GoTo.com Makes a Go of It

Pop quiz: name an Internet company with a successful "name-your-own-price" business model.

Nope, it's not priceline.com (PCLN), William Shatner's latest enterprise, which has unfortunately been caught in a travel-and-leisure demand vacuum.

I'm talking about Overture Services (OVER), until recently known as GoTo.com. Remarkably enough, Overture also claims the distinction of being an Internet advertising-based company whose first-half 2001 revenue was triple the revenue it garnered in the corresponding time period one year earlier.

So much for the dot-com meltdown.

Most Internet advertising companies -- think, for example, of the once-mighty Excite, now part of the bankruptcy-protected Excite@Home (ATHM) -- have gotten bogged down in problems such as the shriveling of free-spending dot-coms, debates over banner-ad effectiveness, and skepticism over the appropriateness of the Internet as a brand-advertising medium.

But Overture has sidestepped most of that problem with the product it delivers: essentially, a pay-for-placement search engine. What Overture does is permit people and companies to bid on any relevent keyword they choose. The results for each search are listed in order of the dollar amount bid, with the highest bidder first.

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Here's how it works: Let's say a consumer is on one of the Internet properties with which Overture has a distribution deal -- America Online (AOL), for example. He's looking for where he can buy steak on the Internet, so he types in "Kansas City Steaks." The first listing to pop up is, in this case, a Web site operated by one Carousel Farms. If the searcher clicks on that listing, he's transported to the Carousel Farms site, and Carousel Farms gets billed five cents for that click-through -- the amount the company bid for that keyword.

The advertiser is happy because it gets to decide exactly how much it will pay to get a potential customer to its site. The consumer is happy because the self-selecting advertiser is relevant to what he's looking for. And Overture profits from it all. In a weak ad market, anecdotal information indicates that the prices being bid for listings are slowly rising.

Competition? Yes, Overture has it. But like another Internet company worth comparing it to, eBay (EBAY), Overture has critical mass. Sure, there are auction sites elsewhere on the Internet, and there are other pay-for-performance companies. But when you're trying to aggregate buyers and sellers, the first-place leader can easily cement its distant lead.

Overture's Achilles heel, however, is its own stock price. At Overture's Tuesday close of $15.71, it's trading at 54 times next year's consensus for earnings, minus goodwill amortization. Yet that may be cheap given the company's growth rate; U.S. Bancorp Piper Jaffray, for example, is projecting 70% earnings per share growth. Overture's stock price has ranged between $4.81 and $28.28 over the past 52 weeks; as a bet on the Internet as a utility, I'd say there's more upside than downside.

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