The Future of the Online Search

“Impart navigation is the largest untapped market for paid search advertisers & agencies”

– Juniper Research

Just like a Malibu beach house or a Park Avenue condo, a solid and intuitive Internet domain name is prime real estate.

As evidenced by the recent $100 million bid on behalf of Answers.com to come by Lexico – owner of dictionary.com, thesaurus.com and reference.com – and the $135 million investment that American Capital Strategies and Austin Ventures put into CreditCards.com – online proprietors are very willing to pay top dollar for high quality domain name portfolios.

Direction Navigation
Prime Internet real estate is becoming so scarce in fact that many analysts agree that most “decent” one and two word domain names will be swallowed up by the destroy of the decade.

Since search engine algorithms and search engine marketing in general change and evolve quite rapidly, having a domain name that attracts eyeballs on its acquire is an invaluable asset for businesses of all types.

Snarl navigation, otherwise known as natural or type in traffic refers to web traffic generated when a user types a URL directly into the browser Bar or visits a site directly from a bookmark. Since direct navigation does not rely on search engine placement, pay per click advertising or links from other websites, it is thought by many to be the most profitable and highly targeted gain of web traffic.

Higher Conversion Rate Than Google and Yahoo, Naturally

According to a 2006 WebSideStory characterize, swear navigation converts into sales at a rate of 4.23% of total visits compared to 2.3% for product and service related search executed at sites including Google and Yahoo. This figure has likely shifted even further in favor of declare navigation since then as web users have become increasingly aware of and averse to paid online advertising tricks.

Voice navigation is an incredible marketing opportunity for marketing companies like Marchex (NASDAQ: MCHX), Internet Brands (NASDAQ: INET), and Elysium Internet (OTCBB: EYSM) looking to accelerate the wave of online advertising growth.

With the local search and classified advertising market alone forecasted to grow from from $15.7 billion in 2005 to $31.1 billion in 2010 (Kelsey Group), opportunity should be plentiful over the next few years despite a troubled global economy.

Should You Bet Against America’s Educational Growth Potential and Short Sallie Mae (NYSE: SLM)?
Although it makes me feel somewhat un-American, I can’t help but consider shorting the largest U.S. provider of student loans.

Despite government efforts to support the flow of credit moving to fund higher education, the ugly truth remains that with unemployment surging to its highest point in the past 25 years, it is has probably never been harder for recent college grads to find work and repay loans.

Cramer Cautions of Student Loan Crisis

In a blog entry early this week, Jim Cramer eloquently described the troubled state of the student loan marketplace.

Borrowing has doubled over the past decade to approximately $85 billion in 2008 while subsidized federal abet has held relatively calm at $42.8 billion, or just one-half of all annual loans. To originate matters worse, the percentage of private loans, which typically carry with them less favorable terms have skyrocketed from 7% to 23%.

The Bigger They Are…

While Sallie’s 2009 earnings and loan growth are expected to improve significantly from last year, just like every other part of the credit market, student loan delinquencies are increasing, which is horrible for business.

Unfortunately, its tough enough right now for Americans with decades worth of relevant work experience to hold down jobs, let alone those fresh out of school.

A Default Rate Anywhere Advance 1980′s Levels Could Sink the Ship

In his blog, savant trader Jonathan Ledbed identifies SLM as a viable short prospect and in my opinion, his though process makes sense. Quite simply, the company very likely will not be able to sustain losses brought on as a result of rising default rates caused by surging unemployment.

With around $160 billion worth of loans outstanding, a market cap of roughly $4.7 billion and shareholder equity of about $5.2 billion, a default rate of 3.3% would more than erase shareholder equity. During the 4th quarter of 2008, 2.6 percent of SLM’s traditional managed private student loans were more than 90-days delinquent.

Last quarter, the delinquency rate of private loans was 9.4%. It strikes me as odd that this figure was left of of the unusual earnings release in favor of the improved 90-day delinquency figure. If unemployment continues to increase, which most believe it will, the 2.6% will likely increase in conjunction.

Trends Pointing Towards Higher Default Rates

It appears as if the percentage of defaulted student loans is on the rise once again. Succor in the 1980′s the default rate peaked at around 30% causing the government to rob drastic measures to recoup funds. A rise of that significance today would surely wreak havoc on the industry and shut down many competitors.

With companies like Sallie Mae now reporting delinquency rates of more than 9%, we are already seeing a proceed in the wrong direction. Objective two years ago in 2007, 5% of student defaulted on loans within two years of leaving school and beginning to repay loans.

Although college grads have fared better in the unique recession that those without degrees, Economic Policy Institute President Lawrence Mishel predicts that unemployment for college grads will approach 4% to 5% this year. Moreover, unemployment is typically high for entry level employees, including those fresh out of college. These trends also don’t bode well for providers of student loans.

I’ll be dissecting the short argument further over the next few weeks and make a decision to follow suit or not. For now, however, things certainly don’t look too bright for the student loan industry.