Internet Advertising May Take Hit From Subprime Fallout
While much of the focus on the subprime mortgage failures has been on lenders and the real estate industry, the collateral damage may be spreading to the internet advertising market.
Two of the five largest Internet advertisers in July, 2007 were Countrywide Financial and Low Rate Source, according to the latest Nielsen/NetRatings report. Online display advertising by mortgage companies grew to $222 million in 2006, according to TNS Global. That comes as no surprise to anyone who has seen the LowerMyBills.com dancing cowboys ads, which were ubiquitous earlier this year. According to the Internet Advertising Bureau, Financial Services were the second largest Internet advertisers in 2006, trailing only the retail industry.
So, where’s the greatest exposure?
Google (GOOG) and Yahoo (YHOO) are the names that come to mind when one thinks of Internet advertising. Google seems fairly immune to a downturn in a single sector; while the keyword price for mortgage-related terms may drop (as might searches for mortgages), that’s not likely to have significant impact on the search engine provider. Yahoo, with more of its revenues coming from display advertising, may have more sensitivity to a pullback in financial services advertising on the web.
Bankrate (RATE) is more of a pure play in online financial services advertising. Nearly 50% of their revenues come from mortgage advertising. Their second quarter numbers were solid, however, and SunTrust Robinson Humphrey analyst Andrew Jeffrey is maintaining a Buy and a $60 target on the stock.
While RATE may trade sideways in the near-term as investors await evidence of the company’s sustainable earnings power through a deep mortgage industry downturn, we contend that the stock offers a compelling risk/reward for those with conviction regarding the company’s superior competitive position, high barriers to entry, increasingly diversified advertiser base, pricing power and operating leverage.
The full SunTrust Robinson Humphrey report, entitled “RATE: It’s Not All About Mortgages. Reiterate Buy” is available for purchase here.
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
