With only 4 trades currently in, I finally got a chance today to go over numbers of a few more and decided to enter a new trade, going long Google vs Short IACI. This is basically a play on a downturn of internet advertising that is affecting IACI a lot more than it is Google.
Google, now an internet heavyweight announced its earnings a few hours ago, coming in with earnings per share of 1.21$ in its first ever quarterly decline as its results are down 67% from the same period last year. It is becomming very clear that the impact of the economic downturn is hurting the advertising business very badly as major companies are cutting their expenses, advertising being one of the easiest ones to accomplish, especially when rivals are doing the same. I am starting to see the impact of this in our internet businesses and it is increasingly clear that the whole industry is getting hurt badly. However, Google seems poised to be hurt less severely mainly for 2 reasons:
- Up until a few months ago, Google was still more in a growth mode than in a monetization mode and that now makes a major difference. Many sections of Google did not contain any advertisements and so the recent drop in ad rates has been partly compensated by the new available spots in areas such as Google Finance or Google Maps. The recent results reflect part of this but not entirely. Another major example would be Youtube. There are no doubts that so far the acquisition by Google has not been profitable but you would have to admit that they were not putting as much energy into it either. Since its start, Google has done business by allowing new products to first gain important market share, get its users hooked and then once that happens, start to introduce ways to generate revenue streams. They seem to be slowly moving in that direction now and that will give them a major advantage in battling this downturn.
- Google has been very innovative in how its ads are displayed and while ads displayed next to searches are still the major part of their revenues, they have been gradually adding ads in videos, in RSS feeds, on mobile content, in maps, etc. This enables them to offer a vast range of advertising options.
IAC/InteractiveCorp on the other hand is one of the most intriguing companies on the internet in that it has owned fabulous properties for a long time but has never been able to truly find its identity. When it did the spinoff of Expedia(EXPE), it was mainly to concentrate on Ask.com, its failed effort to challenge Google in the search business. After putting up massive efforts and amounts of money, IACI finally quit the race and decided to concentrate on other businesses.
But as diverisified as IACI is trying to be, they are getting hit very hard in their main areas:
-Dating: The internet dating industry is going to major changes as the business model is being revisited with many major players deciding to go back to the free model, as they are unable to compete with some other websites that offer the same service without fees. Match.com, owned by IACI will be hit hard by this and have a difficult time generating much profits.
-Search: This will have a slowdown and I would expect Ask.com to be hit more severely than Google simply because many advertisers on Ask are actually using their traffic to send back to Google (pay per click arbitrage).
-Local web: This is one area where I think InteractiveCorp might do better, it is a promising area and they do have solid properties. Their problem is that they are losing market share to Google who has a more important presence on phones, etc and have been expanding their services greatly.
Disclaimer: Author does not have any positions in GOOG or IACI