What Hedge Funds Think About Internet Search Stocks

Despite the massive potential revenue that could be earned from building a successful search engine, there continues to be little competition in the sector, as no one seems willing to even attempt to tackle industry giant Google Inc (NASDAQ:GOOGL), which has dominated search since its inception in 1997.

Just how badly has Google trounced the competition? From 1997 through the end of 2014, the search engine giant has controlled 88.2% of the market according to Statista. In terms of unique monthly visitors it more than triples the visitors of its closest rivals, Yahoo Search and Bing, according to statistics collected by eBizMBA. Needless to say, there has been little movement in the search engine sector for quite some time. Not even the mobile revolution could meaningfully impact overall search engine market share.

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However, that’s not to say things can’t change. In fact, we reported this week on the fact that Apple Inc. (NASDAQ:AAPL) is nearing a very important decision that could have a large impact on Google’s search engine market share and revenues, that being whether to renew its contract with Google to retain the search engine as the default on Apple’s Safari browser, which has over 50% market share in the mobile sector. It’s estimated that as much as 10% of Google’s gross revenue could be riding on the contract.

Of course, it’s hard to judge investor sentiment solely on the search engine side of any of the top search companies, as even Google Inc (NASDAQ:GOOGL) itself has drastically diversified its business over the years, and gets only a portion of its revenues from the search engine side of its business. Nonetheless, let’s take a look at the current stats of the top three internet search stocks, and the investor sentiment that surrounds them on the whole.

Note that while we don’t recommend following hedge funds into such large-cap stocks, as they are much more successful at generating returns from their top small-cap picks, it is always useful to see where the smart money is going, especially if you do want to supplement your portfolio with some less volatile, large-cap picks.

We’ll start with Google Inc (NASDAQ:GOOGL), which continues to dominate internet search. In January 2015, its market share of overall internet searches stood at 88.10%, a slight dip from the 88.99% it controlled in January, 2014. Google gets 1.10 billion unique monthly visitors to its search page, and is the number-one most-trafficked site in the United States and the world according to Alexa.

However, in addition to the forthcoming Apple Inc. (NASDAQ:AAPL) contract decision, Google also recently lost its default search status in Mozilla’s popular web browser Firefox to Yahoo! Inc. (NASDAQ:YHOO), which went into effect on December 1, though only in North America. The results were an immediate drop in Google’s search share in the region, to less than 75%, and a boost to Yahoo’s.

Google Inc (NASDAQ:GOOGL) was one of the most popular stocks among hedge funds at the end of 2014, with 120 funds invested in it, though that number fell from 137, while invested capital fell to $6.11 billion from $7.46 billion. Could the loss of default status in Mozilla affected some of that fleeing? Boykin Curry of Eagle Capital Management was the largest investor in Google among tracked funds, with 1.12 million shares, a 33% increase during the quarter. On the other hand, Crispin Odey’s Odey Asset Management sold out of its 175,600 share position during the quarter.

Microsoft Corporation (NASDAQ:MSFT)’s Bing browser was second among search engines in terms of both volume of searches, and unique monthly visitors, edging out Yahoo in each category. Bing searches accounted for 4.53% of global searches in January thanks to its 350 million unique monthly visitors, while it held a 19.7% share of the U.S market, up 150 basis points from the previous year. Online search advertising for Microsoft Corporation (NASDAQ:MSFT) was also up 23% according to the company’s most recent financial results for the fourth quarter of 2014.


Microsoft Corporation (NASDAQ:MSFT) nearly caught Google in terms of fund ownership last quarter, dipping to 114 from 119, but closing the gap to 6 from 18. Invested capital also dipped, but far surpassed Google’s at $17.87 billion, down from $19.66 billion at the end of the third quarter. That places Microsoft sixth among all companies in terms of capital investment by tracked funds.

Jeffrey Ubben remains a strong believer in Microsoft after playing a role in guiding the company’s transition towards building around its underappreciated and high growth assets. Ubben’s fund ValueAct Capital held 74.24 million shares of Microsoft at the end of 2014.

Lastly is Yahoo! Inc. (NASDAQ:YHOO) and its Yahoo! Search, which ranked third globally with 4.13% of the search volume in January, and 300 million unique monthly visitors. In Yahoo’s most recent quarterly results, search ad revenue remained flat. However the company’s mobile ad revenue share is expected to increase to 4.2% in 2016 from 3.2% in 2014 according to a December report by eMarketer, surpassing Twitter Inc (NYSE:TWTR) for third in that metric, behind only Google and Facebook Inc (NASDAQ:FB).

There was a lot of fund activity in Yahoo! Inc. (NASDAQ:YHOO) during the fourth quarter, related to the company’s valuable investment in Alibaba Group Holding Ltd (NYSE:BABA). Fund ownership increased to 99 during the fourth quarter from 94, and capital investment leapt to $7.59 billion from just $5.31 billion, though partly on the strength of Yahoo’s strong quarter, as shares rose 26.41%. Several funds opened large new positions on Yahoo during the fourth quarter, including James Dinan’s York Capital Management, Christian Leone’s Luxor Capital Group, and Daniel S. Och’s Oz Management. Each initiated stakes of more than 8.99 million shares during the fourth quarter.

Disclosure: None