When to buy internet stocks

Investing in web portal stocks can suit experienced investors and speculators comfortable with higher risk.

A recurring column theme has been to buy so-called online portal stocks during sharemarket corrections. Carsales.com and REA Group featured in BRW’s recent report on 10 top small- and mid-cap stocks for 2012-13. Seek, Wotif.com, Trade Me Group and Webjet were also considered.

Carsales.com and Webjet released cracking full-year profit results this month and were early standouts in the latest profit-reporting season. Like several portal stocks, Carsales.com and Webjet trade on trailing price-earnings (P/E) multiples of about 20 times, which is too rich for many investors.

These stocks deserve a decent valuation premium. They have genuine monopolies or duopolies, attractive business models, strong growth prospects and higher earnings certainty. That is not to say investors should buy portal stocks at any price or assume all have good prospects. The trick is to buy the best quality portal stocks after they are sold off along with the broader market.

It is also worth investigating the next batch of emerging portal stocks, which have far less profile than Seek and Webjet. There have been a handful of initial public offerings (IPOs) over the past five years for small portal stocks, with mixed success and more are on the way.

Online auctioneer Trade Me Group was arguably the best float of 2011-12. It raised $276 million in December and its $2.04 issued shares have raced to $2.97. The New Zealand-based online auctions group was spun out of Fairfax Media (which retains 51 per cent of Trade Me, and owns BRW). I like Trade Me’s prospects but after such strong gains in the past year, it looks due for a pause.

Property information stock Onthehouse Holdings has struggled since listing in June 2011. The Brisbane-based company raised $55 million to buy and integrate three property businesses and its shares have since sunk from a $1 issue price to 39¢, despite announcing this year that it is on track to meet full-year prospectus earnings forecasts and achieving solid cash-flow growth.

Like most IPOs, Onthehouse looked overvalued at listing and the weakening property market has not helped. The release of shares from escrow this year may have contributed to selling pressure. It is a stark reminder to always understand escrow anniversary dates for IPOs and when restricted shares are available to be sold by early seed investors, promoters or related parties.

It might pay to watch Onthehouse’s progress over the next 12 months and the state of the property market before rushing in. Often a smart strategy is to wait a year or more after unknown companies list to gauge their progress. More often than not, they are much cheaper than their valuation at listing, as the hype about their IPO subsides.

A 2007 float, iProperty Group, also struggled after listing. The online property advertising group raised $7.5 million to help it become the Realestate.com.au of south-east Asia. Its 25¢ issued shares tumbled below 10¢ in 2009 and soared to $1.32 earlier this year due to strong growth in user numbers and revenue. Sales jumped from $7.23 million in 2010 to almost $12 million in 2011.

The business lost about $2 million last year. For now, the focus is on winning the race to become the dominant online property advertising portal in south-east Asia. Online advertising spending across most segments in Asia is still a tiny fraction of overall advertising, although growing rapidly.

iProperty looked like a raggedy collection of unknown property sites on listing but there is a lot to like about its strategy, progress and founding team, which featured Patrick Grove, the internet entrepreneur who debuted on the 2011 BRW Young Rich.

Grove wants to repeat the success of iProperty with a $10 million IPO for iCar Asia, which has an expected ASX listing in September. Like iProperty, iCar is targeting south-east Asian countries and it wants to be the Carsales.com of the region. It, too, looks like a raggedy collection of sites. Online advertising expenditure for new cars in emerging Asian countries is minuscule.

iCar wants to grow rapidly through mergers and acquisitions and consolidate what is a fragmented online advertising market for new cars in south-east Asia. Continued strong growth in new car sales, albeit off a much lower base than in Australia, bodes well for iCar and iProperty’s recent success is a big tick, for it gives confidence in management and the board.

Although technically stand-alone companies, iCar’s best asset is arguably the knowledge that iProperty gained during five years of hard slog building an online advertising business in Asia. The two companies will share some assets, cross-promote traffic and have common owners.

iCar is capitalised at $27.8 million at listing. It looks like one of the more interesting micro-cap IPOs in recent years but is speculative: there is hardly any revenue and first profits could be at least three or four years away.

More conservative investors might wait until well after listing before buying iCar and as signs emerge that its strategy is working. Or buy iProperty, which is far more established and on the cusp of faster revenue and eventually profit growth.

Both stocks potentially look like neat bolt-on acquisitions for larger portal companies, if they can make inroads into the large and fast-growing ASEAN countries.

They suit experienced investors and speculators who are comfortable with higher risk.

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