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It is hard to imagine the world without the Internet, yet popular usage of this revolutionary tool is still in its infancy, tracing its origins to the mid 1990’s.  In about 20 years’ time, the introduction of the first consumer friendly Web Browsers and Search Engines has transformed everything we do.

Trend watchers could imagine the impact the Word Wide Web would have on business and commerce.  Conventional thinking looked at the potential to sell products and services online but the best futurists realised that the Internet would change the manner in which comapanies and consumers behaved.

The top three Internet “pure plays” on the ASX today are REA Property Group (REA), Seek Limited (SEK), and Carsales.com (CRZ).  We consider them pure plays because their business is conducted solely over the Internet.  There are no “bricks and mortar” locations enhanced by a website presence.  So what products or service do these three companies sell from their websites?

The obvious answer is advertising, but there is more to the story.  What these trend-setters have done is transform the way we look for a place to live; a place to work; and a car to drive around in.  REA doesn’t “sell” houses; nor does Seek hire people; and Carsales doesn’t sell cars!

Yet all three have been and continue to be wildly successful, as you can see from the following table:

Company (CODE)

Share Price

52 Week % Change

Fwd P/E (FY 2015)

2 Year Earn- ings Growth Forecast

Quarterly Growth (Yr over Yr)

Return on Equity (TTM)

5 Year Total Share-holder Return

REA Group

(REA)

$49.38

+89%

32.49

34%

37.10%

41.06%

69.1%

SEEK Ltd

(SEK)

$17.24

+73%

27.81

21.7%

64.7%

30.9%

48.9%

Carsales
.com (CRZ)

$10.67

+19%

23.2

14.6%

16.8%

60.1%

33.4%
(3 Year)

 

REA is basically an online purveyor of advertising focused on consumer and commercial real estate, with 13 websites in operation around the world.  The service the company provides goes beyond a search portal for property listings, including information on what to look for in a property and tips for financing a purchase.  In addition, REA offers professional services to realtors.   The company has been on the ASX since 1999 and has rewarded long term shareholders with a 59.2% average annual rate of total shareholder return over ten years. 

REA Group has the largest market cap of the three at $6.5 billion, with Seek Limited at $5.8 billion and Carsales.com at $2.5 billion.  What REA does for someone searching for property or with property to sell, Seek does for someone looking for a job or with a position to fill.  Seek has also gone beyond the rudimentary search portal model and now offers online training and some classroom-based educational offerings.  The company has a total of 12 employment websites throughout the world, both wholly owned and in partnership.  SEK began trading on the ASX in September of 2005.  Here is how the share price of these two Internet giants compares over five years:

Carsales.com has become the dominant player for both corporate and individual consumers looking for cars, trucks, boats, bikes, and assorted machinery and equipment.  The website offers more than the ads, including tips and techniques on how to buy.  Carsales also offers data and research related business services to car dealerships and automotive manufacturers and parts suppliers.  In 2013 the company expanded its reach with new mobile and tablet applications and enhanced websites.  Carsales.com began trading on the ASX in September of 2009 and the share price has gone up about 175% since then.  Here is the chart:

On 12 February the company released Half Year earnings, reporting a 10% increase in operating revenue and a 17% increase in net profit after tax (NPAT).  REA Group bested that with a 30% increase in revenue coupled with a 37% increase in NPAT for the Half Year 2014 while Seek Limited won the prize for best in show.  Operating revenue for SEK rose 48% while NPAT leaped 65%.

The question on any rational investor’s mind has to be – can these three winners keep on going?  All have Forward P/E’s characteristic of growth stocks, but all have the growth track record to support a high P/E and healthy forward looking earnings estimates as well.  Speculation has already begun as to whether REA Group might become the first ASX stock to hit $100 per share.  In its 20 February 2014 recommendation, BA-Merrill Lynch raised its price target to $62 from $55 and boldly stated REA has enough positive indicators to make a bull case the stock will hit $100 in two years.  However, among the major broking houses, BA-Merrill Lynch stands alone with a Buy rating on REA. 

While Seek Limited and Carsales.com have more bullish recommendations overall from major broking houses than REA, CRX is peppered with Sells and Underperforms and Seek’s earnings were enough to merit two upgrades to Neutral from Sell and Underperform.  While these three players dominate the Australian market, the key to continued outperformance is successful expansion efforts into other markets.

The Internet has benefited more than retailers or advertising venues.  One of Australia’s hottest stocks right now is G8 Education (GEM), an owner/operator of day care centers and pre-school learning facilities.  The share price is up close to 120% year over year.  Another education stock that is on fire (with admittedly a little less flame) is Navitas Learning (NVT) up close to 50%.  What’s unique about these two companies is that both are “brick and mortar” based businesses.  GEM operates about 300 day-care and education centers with no online offerings of any kind while Navitas focuses on adult learning with more than 30 separate colleges in seven different countries, with only a few online courses.

The Navitas founders spotted what was to become a global trend – the need for English language education and degrees from Western universities for the exploding middle class in emerging market countries.  They began offering a “pathway” for International students to study in Australia, complete with linguistic and social support.  This private education company has continued to expand since its birth in 1994 and now offers professional and vocational training as well – all in brick and mortar locations.

What the Internet did for these two companies was enable access to a market for what they offer.  Prior to an online website giving parents all they need to know about daycare and preschool education, where did they turn for help?  The website allows Navitas to treat the world as its marketplace, attracting international students from around the world.  For both companies, the Internet, in effect, became a portal for the products they offer.  Both have rewarded shareholders.  Here is a table of performance and growth indicators for GEM and NVT:

Company

(CODE)

Share Price

52 Week % Change

Forward P/E (FY2015)

2 Year Earnings Growth Forecast

Quarterly Growth

(Yr over Yr)

Return on Equity

(TTM)

5 Year Total Shareholder Return

Navitas Ltd (NVT)

$7.19

+44%

23.87

15.8%

8.5%

31.98%

31.4%

G8 Education

(GEM)

$4.36

+116%

36.81

5 Yr Est P/EG

1.20

55.2%

12.76

126.1%

 

Since November of 2013 four new companies with business models strongly resembling the five major Internet players we have discussed year have debuted on the ASX.  There are two more that went public since 2007.  Most are two new for major analyst coverage and the performance and growth indicators are scant, but as you will see, investors appear to be drooling over the potential rewards of a few of these “new kids on the block.”  Here is the table for the two companies coming on to the ASX prior to 2013: 

Company

(CODE)

Market Cap

IPO Date

(Issue Price)

Closing Price 1st Trading Day

% Change Since IPO

Current Share Price

52 Wk % Change

ICar Asia

(ICQ)

$95.8m

10 Sept 2012

($0.20)

$0.23

+360%

$1.05

+250%

IProperty Group

(IPP)

$515.2m

10 Sept 2007

($0.25)

$0.95

+1200%

$2.84

+190%

 

Both these companies are already the subject of rampant speculation about the potential to become the next Carsales.com or the next REA Group.  ICar Asia (ICQ) trades on the ASX but its headquarters are in Malaysia.  The company claims to have the largest network of automotive websites in the ASEAN region (Association of Southeast Asian Nations). The company operates six websites throughout the region reaching an estimated 4.8 million car buyers and automotive enthusiasts.  Icar Asia reported Full Year earnings on 27 February and while revenue increased 340% the profit loss of approximately $1.7 million in FY 2012 worsened to a loss of $6.9 million in 2013.  Perhaps the best indicator of ICar Asia’s potential was the announcement in March of 2013 that Carsales.com was acquiring a 19.9% interest in ICQ.

IProperty Group (IPP) is also based in Malaysia and operates 18 different property websites in Asian markets focusing on consumer and business customers.  In contrast to ICar Asia, IPP’s Full Year 2013 results showed a profit increase of 158% to go along with a 23% increase in revenues.

Both these companies were brought public by Internet and media guru Patrick Grove, who on 20 December 2013 brought yet another company onto the ASX – IBuy Group (IBY).  This e-commerce focuses on “flash” sales (discounted offerings on a limited time basis) through four websites in Singapore, Hong Kong, and Malaysia.  There isn’t much financial information to research on this company, but investors may be counting on the business acumen of Patrick Grove as the share price for IBY has gone up about 30% since it began trading.  Here is the chart:

There were two other interesting Internet offerings that went public in December of 2012, both in the education niche. 

Vocation Limited (VET) went public on 09 December 2013 and share market experts are already asking if it could be the “next” Navitas.  VET’s issue price was $1.89 and the shares are now trading around $2.60 for an increase of about 35%.  As its name implies, the company will focus on Vocational and Educational Training (VET) and plans to operate in three channels – Enterprise, Direct Participants, and Industry Solutions.  The Enterprise channel delivers learning solutions to business and government agencies while the Direct Participants channel does the same for individuals.  Industry Solutions include strategic reviews and market research.  On 21 February the company reported Half Year results, which exceeded guidance provided in the IPO prospectus. 

Affinity Education (AFJ) seems like a clone of G8 Education.  The company is also in the business of operating childcare centres and is following the same growth path as GEM – aggressive acquisition of additional centres.  Affinity went public on 05 December of 2013 with an issue price of $1.00 per share and closed its first day of trading at $1.05.  The current share price is $1.40, an increase of about 32%. 

Not all newly introduced Internet stocks meet with the kind of success as the ones shown here.  Freelancer.com (FLN) went public on 13 November 2013 while ISelect (ISU) came on board on 24 June 2013 with an issue price of $1.85.  Here is how the share prices have fared since:

Both have business models that appear to have potential – ISelect offers a comparison website for household utilities and insurance and other financial products and Freelancer.com has job outsourcing as its focus.  Both got off to hot starts, but have softened since.  Freelance’s issue price of $0.50 lept to $2.50 at opening on its first trading day before falling back to $1.60 at the close. It now trades at around $1.40 while ISelect is down to $1.08 from its first trading day closing price of $1.58. 

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.

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