Search engine powerhouses Google (Nasdaq:GOOG) and (Nasdaq:BIDU) simplify the way we find answers. What is supposed to be a time saver has most likely become a time waster. Along the way, advertisers learned that the internet is an excellent venue for reaching potential customers. In 2007, internet advertising totaled $45 billion worldwide. By 2012, that number should grow to $147 billion, 20% of all advertising dollars, according to researchers at The Kelsey Group.

Most investors know the Google story and its $600 stock, but how many know the story of Internet Brands (Nasdaq:INET)? The company is a creation of Idea Labs' Bill Gross. Originally called back in 1998, it adopted the Internet Brands moniker in 2005 to reflect a rapidly diversifying internet media company that today has over 55 vertical web sites providing targeted content in three specific consumer interests: automotive, home-related, and travel and leisure. In March of 2008, the company's websites had 34 million unique monthly visitors and 458 million monthly page views. That's a lot of attention.

What Makes It Tick
The company makes money two ways; first, it monetizes its consumer sites through targeted advertising, and second, it licenses its proprietary content and technology for use by others. In 2007, total revenue was $89.9 million with the consumer sites accounting for 70.9% of the business and its licensing division the remaining 29.1%.

Last year was also a transition year. It bought 45 websites for its consumer internet division and purchased Jelsoft Enterprises for its licensing division. Jelsoft is a developer of proprietary community bulletin board software. Internet Brands biggest advantage is its ability to drive organic traffic to its web sites, raising its profit margins moving forward. Organic traffic is web traffic that comes from unpaid listings at search engines. Pacific Growth Equities feels investors aren't factoring organic traffic into the current price of the stock, which is trading below $7, and presents a good opportunity, attaching a fair value of $12 to its 'buy' recommendation.

2008 Guidance
Internet Brands began with an inauspicious start. It went public November 16, 2007 at a price of $8, well below the $10-12 management hoped for at the time. Since then, the stock has been above and below the IPO price several times, down almost double the Nasdaq. As suggested above, this treatment may not be justified.

When it announced fourth-quarter and year-end earnings at the end of February, Internet Brands also gave guidance for 2008. Company estimates included $100-110 million in revenue, $32-36 million in EBITDA earnings, and EBITDA margins between 32-34%. These would all be healthy increases from 2007. If the company hits these numbers, the price-to-sales ratio would be 2.92, about four times less than Google's and half of Yahoo (Nasdaq:YHOO). It's not an apples-to-apples comparison, but it's still a good barometer for determining if the stock is undervalued relative to the market.

Can Bill Gross Deliver?
As far back as 2000, was considering an IPO. It never happened as the internet bubble burst. Bill Gross, CEO of Idealab, the Pasadena-based technology incubator and owner of 28.6% of Internet Brands stock, definitely has a checkered past. Winning and losing with businesses like Citysearch and eToys, Gross spent $800 million in just eight months during the dotcom bubble. However, he is clearly one of the brightest and most entrepreneurial people in the tech business.

Can Gross run a public company? Fortunately, he won't have to.

Robert Brisco is the man in charge now. He has been CEO of Internet Brands since 1999 and owns of 9% of its stock. Brisco's past includes launching the Los Angeles Times website and new media endeavors. When he first joined the company, it was losing hundreds of millions of dollars. Now profitable, they've come a long way together. (To learn more, read Evaluating A Company's Management.)

Bottom Line
As someone who worked for an online media company, I can relate to what Internet Brands is trying to do. By focusing on a few consumer interests and providing lots of community interaction as well as useful content, it provides advertisers the perfect vehicle to attract the right customers. It expects to make a little from a lot of sites. It won't be easy given the current weakness in both automotive and home-related businesses, but in the long-term this should work

Related Articles
  1. Entrepreneurship

    10 Characteristics Of Successful Entrepreneurs

    Do you have the qualities of a successful entrepreneur? Those who do tend to share these 10 traits.
  2. Investing

    5 Up and Coming Social Media Startups

    Although the days of Facebook's dominance aren't close to being over, here are some new creative platforms gaining traction on the worldwide web.
  3. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  4. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  5. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  6. Entrepreneurship

    Are You Really an Entrepeneur? A Reality Check

    If you are going to be an entrepreneur, and you’re doing it on a shoestring, you’ll need more than a good idea. Here are some skills to master.
  7. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  8. Entrepreneurship

    Digital Nomads in the Modern Economy

    Digital nomads compose a growing portion of the modern economy.
  9. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  10. Career Education & Resources

    Laws & Regulations To Know Before Changing the Name of Your Business

    Discover some of the most important steps you need to take after making a decision to change your legally established business name.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center