On 2 February 2016 the undisputed King of Search, Alphabet born out of Google, swept Apple away from the perch of the world’s largest publicly traded company. Google has dominated the world of search to the point its very name is now used as a verb. You know the expression – Just “Google” it.
In June of 2015 at the annual Advance Search Marketing Expo (SMX) a spokesperson from Google stated the company knows there are over 30 thousand trillion URLs on the web. In addition, it appears Google is not indexing all of them. It seems the web is getting too big for even Google to manage.
That may serve as explanation for what many would consider a startling statement – vertical search is threatening Google’s reign. That was the title of an article appearing on searchengineland.com back in 2013. Search is evolving and the rise of vertical searches has the potential to eat into Google’s massive market share. While Google’s traditional search looks over the entire web, a vertical search focuses on sites relating to a specific topic or category of interest. Once upon a time consumers had to visit individual hotel and airline sites to plan a vacation. Topical, or “vertical”, sites like Expedia and our own Flight Centre and Webjet came along and eliminated the need for multiple Google searches for web addresses for hotels and air carriers.
Although it is still the preeminent search engine on the planet, Google may be slipping. The following graph tracks the growth of Google searches dating back to the year 2000.
As you can see, 2014 was the first time in close to 15 years that Google searches actually declined. US based Internet Analytics Research company comScore found that in 2014 traditional searches declined by 3% while topical or vertical sites grew by 8%.
The growth of vertical search should come as no surprise to Aussie investors who have followed the ASX listed companies operating in this sector. Two of the oldest search engine stocks on the ASX are travel related – Webjet Ltd (WEB) and Flight Centre Travel Group (FLT). The following chart from Yahoo Finance shows the share price performance of the two since they began trading on the ASX against both the ASX 200 and the US DJIA (Dow Jones Industrial Average.
It is hard to imagine now that two decades ago people in search of employment, a car, or a home were limited to searching the classified advertising sections of their local newspapers. Three of the most successful stocks on the ASX qualify as massive disruptors, enabling the movement to the digital age of Internet search.
Seek Ltd (SEK) began as an online portal for job placement. The company has been in business for 17 years, listing on the ASX in 2005 with a first full trading day closing price of $1.52. The following chart shows the share price performance of Seek since It joined the ASX, compared to the ASX 200 and the DJIA over the same period.
Like many fabled companies born in the Silicon Valley of the US, REA Group (REA) began in 1995 in a garage in a Melbourne suburb. Today it operates Australia’s top residential and commercial property sites. Not long after, Carsales.com (CAR) began operating in a time when the Internet was in its infancy – 1997. REA went public in 1999 with a first day closing price of $1.09. As of 25 February the share price had risen to $50.96.
Ten years later Carsales.com began trading on the ASX, closing its first day at $2.94, rising to $11.88 today. Here is a picture of what that kind of performance looks like, again compared to the ASX 200 and the DJIA over the same period.
Given such an outstanding track record, is it too late to consider investing in any or all of these five powerhouse stocks? As the world goes increasingly mobile, vertical search is going along for the ride. All five of these companies now have mobile search functionality. All five pay fully franked dividends. Three of the five have double digit two year earnings growth forecasts and dividend growth forecasts. Let’s look at some numbers.
REA Group has double digit numbers across the board and although the company currently derives close to 90% of its revenue here in Australia, it has five property websites in Europe, one in China, and a 20% interest in the second ranked property site in the US – Realtor.com. REA Group recently acquired iProperty Group (IPP) that has sites in Hong Kong, Singapore, Thailand, Malaysia, and Indonesia.
Carsales.com is also expanding internationally. Currently the company has interests in Mexico, Brazil, and South Korea that as yet have contributed little revenue but have potential. Carsales has 20% interest in an Asian vertical car search site, iCar Asia (ICQ) that has sites in Malaysia, Indonesia, and Thailand. ICQ listed on the ASX in September of 2012, closing its first day of trading at $0.23 and is currently at $0.88 per share.
SEEK already gets about 60% of its revenue from international operations with sites in China, South East Asia, India, Africa, and Latin America.
Flight Centre has brick and mortal travel agency outlets to complement its online search. The company has operations in the US and the UK already contributing revenue with early penetration in China, Singapore, and India that could generate substantial additional revenue.
Webjet has been the best share price performer year over year of the five companies, up 54%. Company management is confident enough regarding the company’s future to have made a bold forecast back in November of strong growth in profit for the next five years.
There are three new vertical search companies that have listed on the ASX in 2015. One is already profitable; the second is has yet to show a profit; and the third is arguably a punter’s special. The following table has some price performance information about each company.
Mitula Group (MUA) is based in Spain but listed on the ASX. The company is both a vertical search engine and an aggregator. In the early days of vertical search, travel sites multiplied like rabbits, leading consumers interested in finding the absolute best deal possible to go from one to the other. Then along came Kayak.com.au, a search engine that indexes or aggregates the results of other search engines.
Mitula has two branded product lines. Nestoria is a vertical search engine for real estate sales and rentals operating in nine different countries. Mitula aggregates content from job, property, holiday rentals, and automotive sites. In essence, Mitula is replicating Kayak in multiple areas of interest.
The breadth and depth of this company’s websites qualifies it as a vertical search operation on steroids. Its reach extends to 40 countries with more than 50 websites in 14 different languages. Most vertical search companies operate on a subscription model, where advertisers either pay for a listing or pay a commission on a sale, or both. Mitula operates strictly on a pay (or cost) per click model (PPC or CPC). Every time an Internet searcher clicks an advertiser on a Mitula or Nestoria website, the cash register rings.
Simon Baker, a former CEO of REA Group invested in the company’s IPO and now serves on its Board of Directors. Mitula offers investors an opportunity all too rare amongst IPO’s – buying a stake in a company that is already profitable and has seen its profit grow in each of the last three years. For FY 2012 the company returned a profit of $482 thousand; for FY 2013 profit grew to $758 thousand and more than doubled in FY 2014, with a net profit of $2.5 million.
As you would expect, Rent.com.au (RNT) is a vertical search company with rental property as its “topic.” The company’s platform includes listings from both property agents and private landlords. Management claims it has 80% market share of online listings of rental properties, but the company has yet to show a profit. In an effort to drive market share Rent.com.au is currently offering its $99 standard listing free of charge. The rental market here is growing but an investment in RNT appears to be extremely high risk, with that risk being the possible entry of REA Group into the rental market.
For punters there is newly listed online dating platform Datetix Group (DTX). Datetix is a relative newcomer to the world of online matchmaking, beginning in 2013. The company claims a proprietary platform, both mobile and fixed location based. What is unique about Datetix is how it arranges matches.
The company’s matchmaking engine does collect information on compatibility attributes, personality traits, and physical attributes and scores and ranks each. Once done the engine comes up with relevant matches. The process is quick, avoiding the routine of scrolling through multiple pictures. Members pay a recurring fee and host or apply for dates at specific times in nearby establishments. Datetix gets a cut from the establishment as well.
Datetix is Hong Kong based and plans its initial focus on the Chinese singles market, beginning in the largest cities, Shanghai and Beijing. The Chinese market is unique in that marriage customs are different. Arranged marriages are common and urbanization has led to singles without family contacts to make the arrangements. Supposedly the vacuum is being filled by “love-hunters” that act as matchmakers, mostly for the wealthy.
The following graph is from the website nexttechstock.com and shows results from the test marketing of the Datetix platform.
As a side feature, the platform also matches for business connections and personal interests like tennis or golf partners. The market for online dating is estimated to be northward of US$4 billion. However, if the market is huge, so is the competition. The Online Dating Magazine estimates there are 8,000 online date sites around the world, with 2,500 alone in the US. As of 2013 the number of sites was growing by about 1,000 each year.
The largest service in the world, Match.com, went public in the US last November with an issue price of $13.50 and a first day close of $14.74. It is currently trading at $10.65.