Analyst Expresses Serious Doubt About Online Ad Sector

The online advertising sector, once a hot prospect with investors, got a serious thumbs-down from an analyst at Internet investment bank Wit Soundview this week, as he downgraded DoubleClick, 24/7 Media and ValueClick.

Jordan Rohan issued a “hold” recommendation for DoubleClick and a “buy” recommendation for the other two stocks, citing “continued lackluster demand for online ads for the rest of 2000.” Before the downgrade, DoubleClick had been at “buy,” with 24/7 Media and ValueClick at “strong buy.”

The new recommendations don’t seem to have hurt the stocks on a generally positive trading day. In late afternoon trading, DoubleClick was up 7/8 to 42. 24/7 Media was unchanged at 14 1/4, and ValueClick was down slightly — 1/4 — to 10.

Rohan based his recommendations on a recent survey of online media companies that found, among other things, that ad rates at DoubleClick’s Select Network have plunged from around $6.00 to $4.70.

“Last week, in the course of customer checks for the online advertising networks, we identified that the caution that has taken hold of the equity capital markets has indeed extended to online advertising,” said Rohan’s report.

During the recent market downturn, online advertising companies have taken to pointing out that “underfunded dot-coms” make up a small percentage of their revenues, hoping to convince investors that a drop in dot-com ad spending won’t be as devastating as one might think. Rohan, though, shoots holes in that argument, saying that media buyers often take a “share of voice” approach. With less competition from dot-coms, the remaining advertisers don’t have to spend as much to keep the same share of voice.

DoubleClick would appear to be the hardest hit by the downgrade, receiving a “hold” rating. Rohan explains that, although it is one of the strongest companies in the sector, DoubleClick is already trading at levels that take its relative strength into account.

Wit Soundview lowered its earnings estimates for all of the companies over the rest of 2000 and early 2001, because of the expected softness in ad spending.

Not all firms with online media and advertising interests were downgraded by Rohan. Diversified media firms, like the Walt Disney Co., Primedia and AOL Time Warner are well positioned, according to the report.

Internet-only firms, like About.com, Lifeminders and Yahoo also got the nod. The first two were praised for growing at a rate that outpaces the Web as a whole, while Yahoo’s long ad contract period — 238 days — won it Rohan’s confidence.

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