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Monday, August 28, 2006

Small Cap: The World Gets Tough For

Stocks: (ANSW)(GOOG)(MSFT)(YHOO)’s revenue is driven by customers that come to its website for retrieve information on more than three million topics.

The company has two big problems. One is that much larger companies like MSN, Yahoo!,, and Google offer similar services. While they may be exactly the same as what does, they are similar enough so that most consumers are not likely to make a distinction.

The second issue that the company has is that its growth in daily queries is slowing considerably. Based on the company’s 10-Q, daily queries were 1.77 million in Q3 05. For Q4 05, they grew to 2.1 million, and then to 2.59 million for Q1 02. However, in Q2 06, the number only rose to 2.69 million. With the growth of search functions on the internet, the number is very disappointing, especially given that the company’s share of the search market is so small.

The company admits that the growth was slow, but does not give any roadmap to an improvement: “Our average daily query traffic grew by 100,000 in the second quarter of 2006 as compared to the previous quarter. We attribute this level of growth, which was significantly lower than in prior quarters, due to the following factors: (i) the amount of content we added this quarter, as compared to earlier quarters, (ii) the success of our various marketing activities and (iii) the popularity of our website amongst the population of Internet users.”’s growing loses also have to be cause for concern. On revenue of $1.511 million in Q2, the company had an operating lose of almost $2.9 million. The company has about $12 million in cash and marketable securities. At the current rate of deficits, the company will be out of cash in four quarters. also has a rich valuation, especially for a company with such small market share. With a market cap of $72 million, the company trades at about 17 times sales. The comparable number for Google is less than 14 times.’s stock has come down some, but probably not enough. It trades at $9.23, against a 52-week high of $15.23 and low of $8.46. If inquiries at the company’s website do not begin to increase at a much better clip, it is hard to see how the stock can maintain its current valuation.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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