The Search Is on for Internet Value

Editor's Note: This story originally ran on RealMoney March 29.

In a follow-on offering to my March 8 column, and in light of the bevy of recent activity among portals and search engines, I'm taking a look at the stocks of some of the leading search engines and ISPs today.

Everyone's aware that IAC/InteractiveCorp (IACI) last Monday announced its plan to buy Ask Jeeves(ASKJ) for $1.85 billion. But there was more action that could help stocks in this sector last week:

• Yahoo!(YHOO) announced that is quadrupling the amount of storage provided with its free email accounts and upgrading its desktop search software in its battle for market share with Google (GOOG) and Microsoft(MSFT).

• Also last week, Time Warner (TWX) said that it settled charges with the SEC that it had overstated ad revenue. The company paid $300 million in fines and reduced revenue for 2000 through 2002 by $500 million. With this cloud lifting, Time Warner can refocus its attention on the America Online brand name.

Shares of Ask Jeeves are essentially in the hands of arbitrageurs, and the stock is 54.9% overvalued by my fundamental screens, diluting the valuation of IAC/Interactive Group. Technically, the weekly chart pattern became positive as a result of the IACI offer with rising 12x3 weekly slow stochastic, and with last week's close of $26.95 well above the five-week modified moving average at $25.04. A weekly close below the stock's five-week modified moving average would be a sign that Ask Jeeves is becoming a drag on the combined company.

Herewith, my stock-by-stock breakdown of the remaining stocks in this sector:

IAC/InteractiveCorp: My fundamental screen is favorable with the stock 30.9% undervalued. The weekly chart pattern is negative, with an oversold reading for the 12x3 weekly slow stochastic and last week's close at $21.09 well below the five-week modified moving average at $22.72. This indicates risk toward the October low of $19.16.

These favorable fundamentals will be diluted by the acquisition of Ask Jeeves, so the combination looks risky for investors at this time. The purchase makes sense from a business perspective, as IACI already owns a host of Internet properties. In January 2005, Ask Jeeves' sites had 42 million unique visitors, compared with 44 million on IAC's sites, and Ask Jeeves owns 5.1% of Internet searches vs. 35.1% for Google, 31.8% for Yahoo, 16% for MSN-Microsoft sites, 9.6% for the Time Warner network, and 2.4% for the rest.

Google: The stock bears mentioning because of its ubiquity, but having just come public in August 2004, there are not enough historical data to rely too heavily of my proprietary models. Fundamentally, Google is 7.6% undervalued with a negative weekly chart profile, but with Google so new, I would not rely on this model for making an investment decision for the company.

Yahoo!: This stock is 32.2% undervalued, according to its fundamentals. The weekly chart pattern is negative, with an oversold reading for the 12x3 weekly slow stochastic and last week's close at $31.41 coming below the five-week modified moving average at $32.74. The Feb. 24 low of $30.30 provides important support.

Time Warner: Time Warner appears 38% undervalued fundamentally, with a neutral weekly chart pattern. The chart shows rising 12x3 weekly stochastic with Friday's close at $17.71 below the five-week modified moving average at $17.96 and the 200-week simple moving average at $20.24. Important chart support is the Feb. 29 low of $16.90.

EarthLink: (ELNK) The ISP is fundamentally 16.1% undervalued with a neutral weekly chart pattern.

United Online: (UNTD) This company, which owns NetZero, Juno and Bluelight, is fundamentally 39.9% undervalued with a negative but oversold weekly chart pattern.

Weekly Chart Profiles Time Warner and Yahoo! stand as the strongest candidates in the group.
DESCRIPTION	SYMBOL	Tech Profile	Stochastic	5WkMMA	200WkMA	Support	Resistance
Earthlink	ELNK	Neutral	Flat	$9.23	$9.25	$7.85	$11.95
IAC/Interactive	IACI	Negative	Oversold	27.56	7.56	19.16	27.56
Ask Jeeves	ASKJ	Positive	Rising	25.04	13.54	25.04	30.85
Time Warner	TWX	Neutral	Rising	17.96	20.24	16.9	19.9
United OnLine	UNTD	Negative	Declining	10.71	10.89	8.6	12
Yahoo!	YHOO	Negative	Oversold	32.74	17.04	30.3	36.5
Source: GMC Reports, Richard Suttmeier

All of these factors make Yahoo! and Time Warner my favorite stocks among the Internet-related names presented in today's column. But I think additional time is needed to see how Ask Jeeves integrates with IAC/Interactive before investors jump into that one.

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