The Internet advertising market is growing, but DoubleClick ( DCLK) isn't keeping pace.Though all systems are go industrywide -- and Internet bellwether Yahoo! ( YHOO) is blowing past financial estimates -- DoubleClick's earnings disappointment late Thursday is confirming the doubts of its critics and testing the patience of its fans. Part of the bullish case on DoubleClick -- an offline and online marketing services company -- is that pricing will stabilize in its online ad delivery business, which accounts for nearly half its revenue. The stock's proponents also argue that the company is developing and acquiring a suite of marketing services that will make it indispensible to major advertisers. But the company's inability to keep pace with industry growth, as well as the bigger-than-expected negative impact of a recent acquisition, are calling DoubleClick's ability to execute on its plan into question. The setbacks are giving investors an excuse to look instead toward other online advertising plays, such as ValueClick ( VCLK) and aQuantive ( AQNT). The developments in some ways echo the straits of tech titan Nokia ( NOK). The Finnish wireless giant saw its shares slide 10% Friday on news that its sales wouldn't keep up with the booming handset market. On Friday afternoon, DoubleClick's shares were trading at $8.85, down $3.09, or 26%. ValueClick was trading at $11.23, down 31 cents, and aQuantive was down 14 cents to trade at $9.96.
Left in the DustOn Thursday, DoubleClick reported that its TechSolutions segment, which comprises ad management and marketing automation, had 9% year-over-year revenue growth in the first quarter. In comparison, Yahoo! reported that organic growth in first-quarter marketing services revenue amounted to 48%. "As long as there's pricing pressure -- which I think there will be -- the business just doesn't grow," says one DoubleClick doubter, a buy-side analyst whose firm has no position in the company. As for DoubleClick's acquisitions to build a suite of marketing services, "they've been saying that for years," says the analyst, speaking on condition of anonymity.
Even one of DoubleClick's supporters found it impossible to repress his unhappiness with the company's first quarter performance. "It's the Same Old DCLK," was how Piper Jaffray's Safa Rashtchy, who has an outperform rating on the stock, led off a Friday note on the company. DoubleClick's disappointing quarter came in "against all data points and trends," wrote Rashtchy. "Making the matter worse, there is nearly no recognition of this subpar performance -- or a plausible explanation for that matter -- except that some of the shortfall was due to timing of the large contracts," writes Rashtchy. "But even with those contracts in, DoubleClick would have not provided any upside to expectations." Rashtchy, who lowered his price target on DoubleClick from $15 to $12, does hold out hope, as do others, for DoubleClick to prevent further pricing erosion in the ad-delivery business with a new product called Motif, which is used to serve up what is known as "rich media" advertising -- ads with elaborate components of audio, video and/or interactivity. DoubleClick "may well reap the benefits of rich media ad serving in the second half and especially in 2005, and all the recent new services and acquisitions should boost the growth rate noticeably in 2005," writes Rashtchy. "As such, DCLK is treating 2004 as a build-up year." Also remaining optimistic was Michael Gallant of CIBC World Markets. Like other analysts, Gallant writes that he was surprised by DoubleClick's forecast that one recent acquisition, of the marketing resource management firm SmartPath, would be dilutive to earnings. "Despite the cost increases that have led us to reduce our estimates, we remain confident in the DoubleClick story," writes Gallant, who cut his price target for the company from $14 to $13 but maintained a sector outperformer rating on the stock.
Suite and SourOthers aren't quite as confident -- at least for the next few months. On Friday, Citigroup's Lanny Baker cut his rating on DoubleClick from buy to sell. "Despite increased emphasis on cross-selling and new "suites" of marketing technology that might improve sales efficiency, sales and marketing expenses rose to a 10-quarter high relative to revenue and are expected to remain heavy," wrote Baker. "At the same time, volume gains, new products and added customers are not yet lifting revenue as we expected, refueling worries about pricing trends."
The stock won't recover, says Baker, "until there is clearer evidence that new products are lifting sales, pricing has stabilized and cost efficiency is being regained." Baker and his firm both own DoubleClick shares, and the firm has done investment banking for DoubleClick within the past 12 months. Meanwhile, other analysts took the opportunity of DoubleClick's disappointment to push other stocks. Credit Lyonnais Securities' Mark Zadell noted that while half of DoubleClick's business is online ad serving, only 9% of ValueClick's business is. A majority of the company's revenue is from online media sales and affiliate marketing. Zadell has a buy rating on ValueClick. Chad Bartley of Pacific Crest noted similarly that ad management accounts for a small portion of aQuantive's overall revenue -- about 13%. Bartley rates DoubleClick a neutral and aQuantive a buy. "Buy AQNT Shares on Any Weakness," Bartley headlined his report.