Things Getting Worse for Answers.com (ANSW)

Answers.com (ANSW) recently announced via a press release (read it here) that due to an algorithmic change in Google Search (remember, ANSW is extremely dependent on Google traffic which we have postulated is behind their acquisition attempts for Dictionary.com), Answers is no longer showing up as frequently in Google searches.

What’s the damage? Traffic levels are currently down approximately 28% from levels immediately prior to the change.

Here’s what the company had to say:

“The major search engines modify their algorithms all the time,” added Mr. Rosenschein (ANSW’s CEO). “This change only demonstrates the sound business rationale behind our agreement to purchase Dictionary.com, because it underscores a primary motivation for the deal: to secure a steady source of direct traffic and mitigate our current dependence on search engine algorithms… As we work to restore normal traffic levels to Answers.com, we are confident that our efforts will result in a stronger and more valuable company.”

The issue of dependence on Google’s traffic is also recognized by Answers’ bulls, notably Michael Eisenberg, an early investor in the company.

Clearly, Answers needs to diversify away its risk inherent in depending on Google so greatly for traffic. The rationale behind the acquisition of Dictionary.com was ANSW’s answer to procuring organic traffic.

Now, things are really tough for Answers. Before this happened, it was unclear that Answers could get a $100M deal done. Now that their traffic is plummeting, it may get even harder. Combined with a cratering high yield market and a decreased appetite for stocks, Answers should be scrambling looking for The Answer.

Disclosure: Author’s fund does not have a position in any of the stocks mentioned here as of 8/1/07.

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Zack Miller is the lead equity analyst for America Israel Investment Associates, LLC. and a former equity analyst for a leading multinational hedge fund. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email zack@profile-financial.com