Looking at the curve on my blog statistics recently it's obvious why five or six years ago people started to take internet-based growth potential extremely seriously. Then came the crash, and everything went quiet, and now slowly, little by little, things have started to pick up again. One day soon some people are going to turn round and notice: the universe has changed. The Economist, for once, is getting things right.
THREE years after the dotcom delirium reached its peak, investors are once again taking an interest in online businesses. This week’s purchase of LendingTree, an online mortgage and loans exchange, by Barry Diller, one of America’s best-known media moguls, is just the latest in a string of acquisitions marking his shift from Hollywood to Silicon Valley. At around $720m, the price paid for LendingTree—in shares of Mr Diller’s USA Interactive (USAi)—represents a premium of more than 40% over the current share price. More broadly, investors are starting to sit up and take notice as the revenues of a select group of online survivors soar and the e-business they do becomes part of the mainstream.
The carnage surrounding the dotcom bust has been so bloody that at times it has seemed like the sector was done for good. High-profile internet companies like Webvan went bust, bringing down with them other internet stars. As investors woke up with a thumping hangover, it suddenly dawned on them that the web would not, after all, change everything: customers saw it as a useful distribution channel but that would not necessarily translate into lots more sales for e-savvy companies. For many firms, the internet meant spending a lot of money on setting up new operations while waiting for a revenue boost that might never materialise. But it is now clear that the web gives a compelling advantage to some types of business, hence the continuing rise of firms such as eBay, Yahoo! and Amazon. Mr Diller is trying to assemble an internet marketplace that can rival these surviving giants............
Mr Diller has hinted that he may sell the poorly performing Home Shopping Network, a television channel, as part of an attempt to raise USAi’s valuation closer to the levels enjoyed by Amazon, Yahoo! and eBay. All three internet survivors have been among the best stockmarket performers over the past year (see chart). Shares in Amazon, which started life as an online bookseller, and which has expanded into videos, DVDs and the like, have risen fivefold from their 2001 low point; eBay has gained 40% this year, and Yahoo! has jumped by a half.
All three have turned in financial performances that have pleased Wall Street, even if profitability still lags robust revenue growth. Last month, Yahoo! announced a 47% rise in first-quarter revenue, and net profit of $46.7m. It is now forecasting that revenue for the year will be above $1.22 billion, higher than previously expected. Many analysts think Yahoo! has Terry Semel, its newish chief executive, to thank for this revival. Mr Semel has changed the site to make it more attractive to advertisers, while adding new job listings and other fee-based services. Following the collapse of online-advertising rates and volumes, internet businesses have been struggling to find a way of making users pay for online services. Even Yahoo! can still only manage to get about 1% of its 200m-plus customers to pay for such services.
Amazon is still losing money, albeit less than before: its loss for the first quarter of this year was $10m, down from $23m for the same period last year. Revenue was up by 28%, to $1.08 billion. The Seattle-based retailer has built sales on the back of discounts and promotions, most notably a free-shipping offer that applies to sales above $25. But this is a costly promotion: altogether, distribution currently costs Amazon $27m more each quarter than it receives in shipping fees from customers.
EBay, the world’s leading online auctioneer, has a business model that unequivocally works better on the internet. Thanks to a host of clever search features, it can match up sellers and collectors of even the most esoteric items. And because of its smart cost and revenue structure—it charges a modest commission on each transaction and does not store goods itself—eBay has been one of the most consistently profitable e-commerce businesses. In the first quarter, its net income more than doubled, to $104.2m, on revenues of $476m. This was partly due to eBay’s acquisition of PayPal, a payments business, last year, though even with the effects of that deal stripped out, underlying sales were up by 56% over the previous year. One of eBay’s greatest strengths, however, is also one of the biggest risks it faces. Its business, like any marketplace, is a natural monopoly, and so once it is established, it is pretty hard for a newcomer to challenge it. This has already aroused the interest of America’s Department of Justice. Its trustbusters took no action after an investigation a couple of years ago, but some think they will be tempted to take another look as eBay expands.
But eBay and the other dotcom survivors still have some way to go before they reach the sort of valuations they enjoyed during the first internet boom: they are currently trading at levels far below their peaks. However, they are also all trading at levels well above the rest of the market. EBay, Yahoo! and Amazon shares are priced at between 67 and 80 times earnings, compared with a current stockmarket average in the twenties and a post-war average of around 15. Have investors finally found the internet’s real pot of gold? Perhaps, but they would do well to remember what happened after the railway fever of the 19th century: the industry had to endure three busts before investors made any serious money.
Source: The Economist
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