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03/15/2010
The Google Dependency Index: A List of Public Internet Companies That Must Kiss Google's, er, Ring
Wall Street has lots of stock indexes. Everyone knows the NASDAQ and Dow Jones Industrials, but there are hundreds of other indexes for almost every sector and capitalization. With that in mind, I offer the Google Dependency Index, which is composed of a list of public companies that essentially find themselves completely at the mercy of Google. I put this list together mostly as an exercise to quantify just how important Google was to the direct financial performance of other public Internet companies and I have to say that after going through the exercise it has convinced me that Google A) is actually even more powerful than people perceive it to be B) there will inevitably be a backlash against this power.
I should note that this is not an exhaustive list because to a certain degree almost every public Internet company is dependent on Google to some extent, but this list contains examples of companies that arguably have the most significant exposure to Google. So without further ado here is the Google Dependency Index:
Sub-Sector: Direct Dependents (Companies that actually get cash from Google)
America Online (AOL): Ever wonder how much Google pays AOL to be its default search engine? Well in 2009, Google paid AOL $556M or 17% of its total revenues for the privilege. Given that this referral revenue comes with very little costs, it’s a safe bet to assume that the share of AOL profits attributable to Google are probably are least 30% and perhaps higher.
Answers.com (ANSW): Question: How much money you could make if you started a wildly popular web site and only monetized it only using Google Adsense? Answer: you would make about $21M in gross revenues, or at least that’s what Answers.com did in 2009. Answers, according to Quantcast, is the 15th most visited site in United States with 55M monthly unique visitors, most than craigslist or Bing or MySpace. In 2009, Google generated 89% of Answers.com’s traffic and 88% of its revenues.
Infospace (INSP): Infospace has a collection of “meta-search” web sites, the most prominent of which is Dogpile.com. These meta-search sites split any ad revenues from click-throughs with the search sites. 95% of Infospace’s $207M in 2009 revenues came from either Google or Yahoo in return for search traffic and while Infospace doesn’t disclose the split between the two, it’s a safe bet that with Google’s ever increasing market share, Google accounts for an ever increasing share of that 95%.
Incredimail (MAIL): Incredimail is a software developer that used to make it’s money by selling share-ware applications such as a POP3 e-mail client and a universal chat client. It still makes those programs, only now it primarily monetizes those programs not through license fees, but by replacing people’s default search provider with Google and by integrating Google search into its programs. The results? Fully 70% of its $21.9M in revenues during the first 9 months of 2009 came from Google and that percentage is increasing quickly.
Vertro (VTRO): Vertro has a similar model to Incredimail in that they develop a software program which generates revenues by directing search queries back to Google. In Vertro’s case they have a “universal toolbar” called ALOT. The search box on this toolbar points to Google. As a result, fully 90% of Vetro’s $19.6M of revenues in first nine months of 2009 came from Google.
Sub-Sector Indirect Dependents (Companies that depend on Google for traffic, but not direct revenues):
As mentioned before, almost every Internet company is an indirect dependent of Google to some extent given how important search traffic is to revenue generation, but here a few examples of companies that are particularly dependent:
E-Health (EHTH): Quick question: Who has the #1 organic search position on Google for “health insurance” and the #1 paid search position? Why eHealth does. #1 Organic results for high value ecommerce transactions are worth a fortune and these days you can literally build a company on top of them. eHealth doesn’t disclose just how much of its new business is referred to it by Google, but it does note “We depend upon Internet search engines to attract a significant portion of the consumers who visit our web site” in its 10K.
Internet Brands (INET): Internet brands runs a collection of web sites, many of them ecommerce lead gen sites, such as Cars.com. Internet Brands doesn’t publicly disclose how much of their traffic is referred by Google, but it’s enough that their lawyers forced them to include a risk factor which says that search providers drive a “significant amount” of their traffic.
Local.com (LOCM): During the first nine months of 2009, Local.com spent $19M on paid search, $13M of that on Google, and that spending generated 56% of its overall traffic. Local.com’s traffic arbitrage expenses account for almost 45% of its total expenses.
ShutterFly (SFLY): Shutterfly maintains high organic search rankings for its key products including photo printing and photo cards. These high organic results most likely drive a huge amount of its traffic.
US Auto parts (PRTS): US Auto parts runs a large network of auto part supply web sites. One of the expressed goals of this “network” is to have multiple PRTS owned sites show up on the front page of organic search results and thereby increase the probability that PRTS will get a click-through one way or another. PRTS doesn’t disclose how important Google’s organic and paid search traffic is to its business, but it is the 2nd risk factor listed in their 10K.
So there you have it, there are at least 10 public companies that basically owe their continued good fortune to Google one way or another and thus clearly belong in the Google Dependency Index. This dependency not only underscores just how important Google is to the overall Internet economy, but it sets the stage for the inevitable backlash against Google because some of these companies will inevitably cry foul should they lose a significant portion of their much prized Google traffic.
Google’s response to such cries will likely be, “You can’t blame us for the changes, our unbiased algorithm did it”, but as I will outline in my next post, Google’s algorithm is rapidly and inevitably becoming anything but unbiased and this transformation will ultimately make Google more evil than good in most companies’ minds.
If you have a suggestion for other public Internet companies that should be included in the index, leave a comment with the ticker and an explanation as I'd be interested to see what nominations other people have.
This is not investment advice, just some observations about how damn powerful Google has really become. Please read my disclaimer at the bottom of this page.
March 15, 2010 in Internet, Stocks | Permalink
01/02/2009
2008 Internet Stocks: Year In Review Plus 10 Best and 10 Worst Stocks
Internet stocks outperformed the market in 2008, albeit in the wrong direction. Overall, the internet sector declined -52.2% during 2008 vs. the NASDAQ's -40.5% decline and the S&P 500's -38.5% decline.
Out of 128 year-end stocks in the sector, the average stock declined by -52.3% and the median stock declined by -56.2% indicating that declines were pretty well balanced across small and large cap Internet stocks.
It's interesting to note that Google, which accounts for a whopping 41% of the sector's capitalization was down 56%, slightly more than average, which means that Google actually underperformed the Internet sector as a whole.
Believe it or not, but only 4 Internet stocks or just 3% of the total managed to post a gain in 2008. That means that 60% of the Top 10 performing Internet stocks of 2008 actually lost money. See for yourself:
2008 Top 10 Best Performing Internet Stocks
About the only notable trend in the Top 10 was the strength of Chinese Internet stocks which is kind of surprising given that the main Chinese market was down 65% for the year. Some of this may have to do with the fact that Chinese Internet firms already traded at very low relatively PE's prior to the crash but in general it's a bit confusing.
In terms of losers, as with our review of Software stocks, the competition to make the list of Top 10 losers was fierce and required an even bigger decline to make the list.
2008 Top 10 Worst Performing Internet Stocks
No real trends here either except to point out the that top two companies changed their names during the year as part of a rebranding/restructuring exercise. Kowabunga indeed!
January 2, 2009 in Internet, Stocks | Permalink
2008 Software Stocks: An Oveview Plus The 10 Best and 10 Worst
While software stocks got hammered in 2008, they basically declined "in line" with the rest of the market as the total software market cap was down 40.9% which is just about equal to the NASDAQ's 40.5% decline and just slightly worse than the S&P 500's 38.5% decline. As I noted in my piece on 2008 Software M&A, total software market cap now stands about 25% lower than it was five years ago. Ouch!
Out of 231 year-end stocks in the software sector, the average stock declined -45.8% indicating that large caps out performed small caps during the year. The median stock declined -49.3% or put another way, about 1/2 of all software stocks declined by just about 50% or greater during the year. Yes, it was as bad as you think it was
Just 16 out of 231 or 7% of software stocks managed a gain in 2008. For amusement's sake, here's a list of the Top 10 stocks in 2008:
Top 10 Best Performing Software Stocks of 2008
A couple interesting notes about this list of winners:
- Medical Administration was the clear "Defensive Niche" of the year winner in software. While overall the sector still declined 8.5% (the next best sector, network management, declined 20.4%), it obviously rode out the market much better than anywhere else. Some of this out performance undoubtedly was due to speculation that the health care sector will benefit from an Obama administration. It will be interesting see if that actually turns out to be the case in 2009.
- 6 of 2008's Top 10 actually declined in 2007, a year in which the software sector was up 14.2%. This indicates that most of these "winners" were stocks that recovered from poor fundamental performance in 2007/2006.
- Autonomy and S1 were the only stocks to the make the Top 10 Gainers that also posted double digit gains in 2007. Autonomy was up 72% in 2007 while S1 was up 32.5% in 2008. S1's gain is all the more impressive given that it's core customer base is composed of retail banks.
In terms of losers, the competition was fierce, but a handful of stocks went the extra mile and were able to qualify for the Top 10 Losers in 2008. To gain entrance to this elite group, a stock had to decline by a minimum of 85%!
Top 10 Worst Performing Software Stocks of 2008
Not much to say about this list other than it was interesting to see that three gaming companies made the list (Atari would have made it too but it went bankrupt earlier in the year) which suggests that gaming is indeed a "hit or miss" sector and this year it had quite a few misses
January 2, 2009 in Software, Stocks | Permalink
2008 Software M&A: Year in Review
Unlike the Internet M&A space, the public software company M&A market was actually fairly robust in 2008 with 33 deals worth over $40BN closing. That's actually up from 2007 when 28 deals worth $18.5BN closed. That said, most of the increase has to do with several large, complex deals announced in 2007, including Nokia's purchase of Navteq and TomTom's purchase of Teleatlas, taking almost a year to close, but it remains that despite the terrible market, public software company was actually fairly robust in 2008.
2008 continues the long term trend of increased public software company M&A. As the graph below makes clear, software M&A has been in a solid uptrend since 2004.
# of Public Software Company M&A Deals 
As outlined initially in a post several years ago on the incredibly shirking software industry there are a number of trends driving increasd M&A in the software space and these trends appear to accelerating. The total number of public software companies decreased 11.5% in 2008 vs. 11.2% in 2007 and 11.1% in 2006. Total market cap of the software sector is now $618 BN, down 25% from 12/31/03. Good lord.
One interesting observation is that this consolidation does not appear to be driven from the "top down". Despite significant M&A activity on the part of the "Big Four" software companies (Microsoft, IBM, Oracle, and SAP) over the past five years, their share of the software sector's market cap has actually decreased from 70% to 68% over the past 5 years. I wouldn't have believed them if somebody told me this before today, but it's true. Granted, most of this decrease has to do with a 27% decline in Microsoft's market cap in the last 5 years (16% if you exclude their $3 special dividend). Of the Big Four only Oracle has seen it's share price and market cap increase in the last 5 years. What this suggests is that consolidation within the software industry is taking place at all levels and that the largest software companies are ultimately not really taking share from the market. Pretty much counter intuative to conventional wisdom within the software space, but right now that's what the numbers say.
Click on this link for a complete list of all the public company software M&A deals in 2008.
January 2, 2009 in Software, Stocks, Wall Street | Permalink
01/01/2008
Top 10 Software Stocks of 2007
2007's list of Top 10 Software Stocks is a mixed bag. There is an IPO, a few turn-arounds, some SaaS companies and some security companies, but no consistent themes. To be sure, Software as a Service and appliance-based software remain perhaps the most important software themes right now, but they don't dominate the Top 10.
To qualify for this list a company had to start 2006 with at least $50M in market cap and its main business had to be selling software as a license or a service. So, without further ado, here are the Top 10 Software Stocks of 2007:
- ZIXI
Price Change: 287% Ticker: ZIXI
Comment: - VM Ware
Price Change: 193% Ticker:VWW
Comment: The software industry's most anticipated IPO of 2007 lived up to its top billing. VM Ware dominates the rapidly growing virtualization space and the market has rewarded it with a premium price. - Phoenix Technologies
Price Change: 186% Ticker: PTEC
Comment: Living up to its name, PTEC rose from its own ashes in 2007 on the backs of successful restructuring and new management team. - BlueCoat Systems
Price Change: 175% Ticker: BCSI
Comment: BlueCoat saw rapid growth in its core markets of WAN security and acceleration as well as increased adoption of appliance-based solutions by the security market in general. - EBIX Inc.
Price Change: 162% Ticker: EBIX
Comment: EBIX accelerated in 2007 as its focus on providing Internet solutions to the insurance industry helped it rapidly grow revenues while avoiding any fallout from the problems hitting the rest of the financial sector. - Innodata Isogen
Price Change: 148% Ticker: INOD
Comment: Innodata saw revenues accelerate as its "flat earth" approach to content management and production gained favor with customers. - Vasco Data Security
Price Change: 136% Ticker: VDSI
Comment: Years of trying to convince banks to deploy authentication software and tokens (as well as a few hackers making some big scores) finally paid off in 2007 as Vasco benefited from a surge in interest in multi-factor authentication. - Broadvision
Price Change: 130% Ticker: BVSN
Comment: After a near death experience in 2006, Broadvision bounced back as a stable and profitable player in the content management space. - Concur
Price Change: 126% Ticker: CNQR
Comment: This SaaS poster child benefited from its domination of online T&E reporting as well as software investor enthusiasm for all things SaaS. - Taleo
Price Change: 118% Ticker: TLEO
Comment: Taleo saw its stock rise as investors began to recognize the importance of the talent management sector and wanted to own the #1 player.
January 1, 2008 in Software, Stocks | Permalink
Top 10 Internet Stocks of 2007
2007's list of top performing Internet stocks provides a little bit of de ja vu from 2006's list. As was the case in 2006, China remained a hot investment sector, although this year's China winners are different than last year's. Three of last' year's Top 10 performers repeat in 2007, something to be truly admired in the rough and tumble Internet sector.
To qualify for this list the company had to start 2007 with a market cap of at least $50M and its business had to be focused on the Internet.
So, without further ado, here are the Top 10 Internet Stocks of 2007:
- China Finance Online
Price Change: 392% Ticker: JRJC
Comment: The Chinese stock market was "en fuego" all year and what better way to play that market than an Internet company that sells online financial services products and information. - Baidu.com
Price Change: 246% Ticker:BIDU
Comment: China's #1 search engine appeared to be pulling away from the pack in 2007 despite desperate attempts by Yahoo and Google to get in the game. Right now the market seems to think Baidu is going to win. - Tradus
Price Change: 184% Ticker: TRAD.L
Comment: Formerly known as QXL and a serious competitor to EBAY in Eastern Europe, QXL's stock was supported by takeover rumors all year, which turned out to be true in December when South African media group Naspers announced a deal to acquire it. - Acquantive
Price Change: 168% Ticker: AQNT
Comment: Aquantive was acquired by Microsoft in the middle of the year after they scrambled to respond to Google's acquisition of privately held Doubleclick. - Priceline
Price Change: 163%% Ticker: PCLN
Comment: - Omniture
Price Change: 136% Ticker: OMTR
Comment: Last year's #7 stock moves up one spot to #6. After a successful IPO in 06, Ominture grew quickly in 07 and announced the acquisition of its main public competitor (VSCN). - Amazon.com
Price Change: 135% Ticker: AMZN
Comment: The granddaddy of online retailing flexed its growing muscles in 07. Thanks to growing revenues and somewhat decreased tech spending margins expanded quickly and earnings accelerated. - SOHU.com
Price Change: 127% Ticker: SOHU
Comment: One of China's largest portals saw impressive growth and benefited for investor appetite for all things China. - Gigamedia
Price Change: 92% Ticker: GIGM
Comment: Last year's #2 stock, holds on to a Top 10 position. Unlike other gambling stocks, Gigamedia's focus on Asia as well as its casual games help it buck the trend and keep growing without regulatory interference. - BlueNile.com
Price Change: 84% Ticker: NILE
Comment: The Internet's largest jewelry retailer saw its stock take off in 2007 and it reached critical mass and began to drive impressive margins.
January 1, 2008 in Internet, Stocks | Permalink
06/22/2007
Software and Internet IPO and M&A Lists
Every month I keep a record of all significant public company activity in the sectors I am most interested in: Software & Internet. I keep records of all IPOs in those sectors as well as all public company M&A. I've decided to try out Typepad's relatively new "page" feature by open sourcing these transaction lists.
The links should be good forever and I will try to update the lists each month as I already do this internally. The lists start in 2004 and are current as of 5/30/07. Recently announced M&A deals are not listed because they have yet to close. It's kind of fun to take a walk down memory lane, and see just what has happened over the last few years in each sector. So without further ado here are the lists:
Internet IPOs
Internet M&A
Software IPOs
Software M&A
If you see anything missing or anything that needs a correction just e-mail me.
June 22, 2007 in Internet, Software, Stocks, Wall Street | Permalink | Comments (3)
01/19/2007
Private Equity's Software Buying Binge
In 2004 there were, by my count, about 18 acquisitions of public software companies and Private Equity firms made none of them. By 2006 however, not only had the number of acquisitions risen to 32, but Private Equity firms accounted for 25% of them, up strongly from 11% of deals in 2005 (See table below).
| Year | Total Deals | PE Deals | % PE |
|---|---|---|---|
| 2004 | 18 | 0 | 0% |
| 2005 | 27 | 3 | 11% |
| 2006 | 32 | 8 | 25% |
At this rate I wouldn't be surprised to see private equity account for over 50% of deals in a couple years.
Who Said Maintenance Revenues Aren't Beautiful?
Private equity firms have taken a liking to software firms not because they believe software to be a great growth market but largely because most software firms have what PE firms might call "immature" balance sheets, with little or no debt and relatively high levels of cash. Rather than targeting fast growing software firms, PE shops typically target "mature" software companies as they not only tend to have lots of cash but they also derive a large percent of their revenues from maintenance revenues. These revenues are seen by private equity investors and, more importantly their lenders, as a stable source of cash flow that can be used to finance lots of debt.
Seven Steps To Carry
The basic private equity software play book goes something like this:
- Buy software company
- Do dividend recap in which you simultaneously lever up the balance sheet and dividend out all the cash you just borrowed plus most of the existing cash on the balance sheet.
- Raise new fund off of massive IRR created by dividend recap.
- Do lots of acquisitions to make organic growth impossible to discern
- Raise prices, slash R&D, increase sales and marketing.
- Take company public/sell it at same PE you bought it for to investor/large company apparently unfamiliar with the concept of enterprise value.
- Repeat.
Now I admit this is a bit of snarky characterization of PE software deals because software offers some unique scale effects in SG&A, but I think this characterization is probably closer to the truth than a lot of mumbo jumbo about "value add" "synergies", etc.
And the Winner Is....
For my money,the most notable (and most ironic) private equity buyout
of public company in 2006 was the acquisition of SSA Global by Infor.
Why? Because SSA Global was itself a private equity sponsored roll-up
of public software companies (including Baan, Ironside, and Epiphany)
which was public for all of a year before it was bought by another
private equity sponsored roll-up of public companies, Infor, which
now rather immodestly claims to be "the fastest growing enterprise software
company in the world".
To have the two companies that are following the private equity playbook to a T merge with one another after the first one was only public for a year is just priceless. I can't wait to see the prospectus for Infor and how they back up their claim to be the fastest growing enterprise software company in the world, it should be a classic.
January 19, 2007 in Stocks, Venture Capital, Wall Street | Permalink | Comments (4)
01/05/2007
Top 10 Software Stocks of 2006
Software stocks may have only performed in-line with the rest of the market, but these stocks were at the top of the class. The easiest way to make this list in 2006 was to be bought by a strategic acquirer such as IBM, HP, pr EMC. Other than that, it's pretty much a grab bag of stocks but medical software stocks were particularly strong, as were open source and VOIP related stocks.
To qualify for this list a company had to start 2006 with at least $50M in market cap and its main business had to be selling software as a license or a service. So, without further ado, here are the Top 10 Software Stocks of 2006:
- Interactive Intelligence
Price Change: 340% Ticker: ININ
Comment: - VA Linux
Price Change: 183% Ticker:LNUX
Comment: Operator of open source software portal "sourceforge.org" and geek news site Slashdot.org saw shares rise as Sourceforge.net grew quickly and as it released an enterprise software version of sourceforge.org. I will be moving this to the Internet sector for 2007 given that it is more much a content/e-commerce play now than it is a software company. - RSA Data Security
Price Change: 149% Ticker: RSAS
Comment: Early leader in hard tokens and public key encryption was bought by EMC this past summer for a nice premium. May be first of several security acquisitions by EMC. - Smith Micro Software
Price Change: 143% Ticker: SMSI
Comment: Provider of a multitude of wireless software products and owner of the venerable Stuffit program, saw sales rise as carriers such as Verizon stuck deals for several of their software products. - Allscripts Healthcare Solutions
Price Change: 101% Ticker: MDRX
Comment: - Quadramed
Price Change: 92% Ticker: QD
Comment: Another medical records software company. I think I see a trend. - Acutate
Price Change: 89% Ticker: ACTU
Comment: Business intelligence vendor benefited from finally turning profitable and from it's emerging open source platform. - Mercury Interactive
Price Change: 87% Ticker: MERQ
Comment: Application performance management vendor that put enough of its accounting problems behind it to secure a sale to HP. - MRO Software
Price Change: 83% Ticker: MROI
Comment: One of 3 public software companies that IBM bought in 2006. Not sure how this fits into IBM's "we don't compete with our application partners" party line. - Mentor Graphics
Price Change: 74% Ticker: MENT
Comment: EDA tools vendor saw a nice rebound after a terrible 2005 as license sales picked back up.
January 5, 2007 in Software, Stocks | Permalink | Comments (2)
Top 10 Internet Stocks of 2006
While 2005's Internet winners were dominated by the themes of online advertising and gambling, 2006's key themes were China and broadband. Four of the Top 10 stocks were focused on China while 3 were focused on broadband infrastructure.
To qualify for this list the company had to start 2006 with at least $50M in market cap and its business had to be focused on the Internet. So, without further ado, here are the Top 10 Internet Stocks of 2005:
- Navisite
Price Change: 458% Ticker: NAVI
Comment: - Gigamedia
Price Change: 243% Ticker:GIGM
Comment: What do you get when you combine China with gambling? An incredibly hot stock that's what. - China.com
Price Change: 197% Ticker: CHINA
Comment: The right ticker at the right time. With anything China related hotter than a Szechuan Spicy Beef, it was China.com's time to shine. It didn't hurt that they made a major move in online gaming too. - Akami
Price Change: 167% Ticker: AKAM
Comment: Internet video was white hot in 2006 and Akami's CDN serves the most video of anyone so investors saw them as platform level pure play on the growth of internet video. - Knot.com
Price Change: 129% Ticker: KNOT
Comment: - C-Trip
Price Change: 117% Ticker: CTRP
Comment: China's top online travel agency benefited from the overall China craze and increased travel by the emerging chinese middle class. - Omniture
Price Change: 117% Ticker: OMTR
Comment: The only IPO on the list. Omniture didn't go public until mid-year but made up for its late start as it became the SASS darling of online analytics and took market share quickly. - The9
Price Change: 111% Ticker: NCTY
Comment: China. World of Warcraft. Need I say more? - Internet Gold
Price Change: 100% Ticker: IGLD
Comment: Israeli ISP rises due to merger with rival and ventures in online video and broadband access. - Priceline
Price Change: 99% Ticker: PCLN
Comment: Rising hotel and airline fares combined with increasing business travel send consumers scrambling to find cheap deals the Internet.
January 5, 2007 in Internet, Stocks | Permalink | Comments (1)
