A lot of people are down on the Internet advertising market. Yahoo!, for example, has adjusted its fourth-quarter earnings expectations based on slow ad sales. And with banner ad click-through rates plunging, stocks that depend on a strong ad sales market have taken a dive with them. Well, I'm going to venture out into the deep end this month. I think some ad companies are undervalued and now is the time for a play in this space.
Take DoubleClick (NASDAQ: DCLK), the undisputed leader in Internet ad serving and ad-network markets. Its chart looks like a disaster area, falling from a high of $130 in January to a low of $15 per share at the time of writing. But contrary to the prevailing opinion, I think DCLK is seriously undervalued. Here's why I'm putting it in the CU fund.
Banner ads are not going away any time soon. Eyeballs mean dollars, and Internet eyeballs are growing, even though the number of eyeballs that become transactions is falling. For a variety of reasons, banner ads will be the prevailing form of Web marketing for a few years, and chief among them is bandwidth.
A while back, I attended a one-day conference in which many of the panelists pronounced banner ads dead. One of the participants asked, "If banner ads are dead, what will replace them as a means of gaining value from Internet traffic on content sites?" A very good question. The panelist's answer: Banners will not go away, they will just change into Internet commercials in which full-motion video would display in the banner space and click-throughs would become rich multimedia experiences.
This may be true, but we are a long way from having the kind of universal broadband that would make it possible. On our site, for example, we experience a change in download speeds for the majority of our users (yes, still at 28.8 Kbps) if we post a banner that is 2KB larger than the others. With full-motion video, we're not talking about 2KB, we're talking about 100MB files (at least) streaming though local pipes. We're years away from the kind of bandwidth that can account for this outside of the workplace. And I don't think many companies will take huge downloads lightly, given the recent Napster bandwidth backlash.
So it's banner ads for at least the next couple of years, and the undisputed king is DoubleClick. Speaking from experience, it is not only the largest, but also the most respected ad serving company. When problems with our previous ad-serving vendor forced us to go to DoubleClick, our Internet ad sales immediately turned around. Many of the clients said the difference between dragging their feet and closing the deal was DoubleClick. Such is its reputation in the industry.
I'm not going to go wild and claim that DCLK will return to its former lofty heights. But I do think it will rebound into the 30s by third-quarter 2001. If you can double your money within a year, you know you've done good.
