DoubleClick Still Faces A Hostile Business EnvironmentDoubleClick Still Faces A Hostile Business Environment

Privacy: We all want it, but we also want the benefit of businesses knowing us better to provide us with improved products and services. When the issue of privacy on the Internet became a hot topic for consumers, the Federal Trade Commission started investigating the matter. No name was correlated with the privacy issue more widely, and negatively, than that of DoubleClick Inc., the online advertising company. It was one of the companies that became inextricably associated with Internet privacy. In particular, the company attempted to merge offline data and online data to build user profiles. This didn't give the privacy advocates any warm and fuzzy feelings.

DoubleClick (DCLK--Nasdaq) helps customers, mostly dot-coms, target and deliver banner ads on Web sites. The company generates revenue from three lines of business: DoubleClick Media (around a third of revenue), DoubleClick Techsolutions (around half), and DoubleClick Data.

DoubleClick Media sells ad space on Web sites and facilitates the placement of ads so the correct target group is reached. This is achieved through a technology called Dart (dynamic, advertising, reporting, and targeting). The media division was DoubleClick's largest revenue segment--but during the last 12 months, revenue has declined 51% relative to last year and 6% compared with last quarter. Part of the decline is, of course, due to the dot-com bust. The upshot is that advertisers such as auto manufacturers and airlines now comprise 66% of this segment's revenue.

DoubleClick Techsolutions lets companies serve up the ads themselves using the Dart technology. This gives a company more control over whom it targets and what types of ads are appropriate. In addition, a company can use this software for E-mail campaigns. This segment is DoubleClick's largest revenue generator, and much of management's attention is focused here. This is partly transforming it into a tech-solutions company.

The third division, DoubleClick Data, initially collected data from the online ads and the people who clicked on them. The company then acquired database company Abacus to build more extensive profiles on users by combining offline data such as addresses and names with interests identified through monitoring online. This felt too much like Big Brother to many people, however, and privacy groups complained. The

FTC then launched a probe into alleged mishandling of data and violation of privacy agreements but completed its investigation without filing any charges. Because of public pressure, DoubleClick and other online advertising companies reached an agreement with the FTC concerning privacy that foiled attempts to build extensive user profiles. Instead, DoubleClick develops profiles based on anonymous users, and when your behavior matches one of these profiles, DoubleClick presents ads that it determines are relevant. There are still a number of lawsuits pending against the company. However, this is now a business matter and has diminished in relevance as an investment issue. Therefore, the privacy issue is relatively minor, although it's a business risk.

More relevant to DoubleClick's investment value is the cyclical nature of its business with its strong ties to advertising and technology demand. Technology isn't immune to economic slowdowns and never has been. Most investors forgot this during the late '90s, but I'm sure many won't forget the recent tech slowdown. Typically, most companies view advertising spending as a discretionary item, so many established advertising companies are feeling the pinch.

The business environment is still hostile for DoubleClick. Management lowered its guidance for full-year results and revenue is expected to decline 10%. Business might not turn up until the second half of next year. A more serious issue is the lack of profits, which the company says might appear in 2002. On this basis, DoubleClick still looks expensive, with a fair value in the mid to high single digits. Valuation, not privacy issues, makes me stay away from this stock.

WILLIAM SCHAFF is chief investment officer at Bay Isle Financial Corp., which manages the information 100 Stock Index. Reach him at [email protected].