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Domain Name Specialist Uses PE Ratios to Show Domain Names are Undervalued
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| June 20, 2005 - (HOSTSEARCH.COM) - Domain name consultancy DomainMart today released a report using PE ratios to demonstrate that domain names are considerably undervalued. Sighting the observations below, the report concludes that PE ratios derived from sales data are low. (1) Domain name PE ratios are about half that of the lowest industry group (Table 1 above) and are less than 13% of that of an average stock. (2) Marchex - MCHX (NASDAQ NM) – has a PE ratio of 219.7, which is 27 times the ratio it paid for the Ultimate Search portfolio. (3) Domain name earnings tend to be underestimated. Estimated earnings for a domain name typically assume that it is parked, which is not necessarily the best use of a domain name. Using such earnings data tends to underestimate a domain name’s earning number in the denominator of its PE ratio. Thus, artificially inflating the PE. Hence, although it seems that investors are paying high ratios, the actual PE is lower than the reported 5-7 multiples. (4) The acquisition of a portfolio of assets is typically valued at a PE ratio that is lower than the average of individual PE ratios. Low PE assets are good investments for the flowing reasons: (1) For investors who subscribe to the value investing school, one measure of value is the PE ratio. Thus, when comparing across domain name classes, a domain name that fetches PE of five is viewed as cheaper than one that trades at a PE of, say, ten. (2) For those investors who prefer to compare what they make on domain names to what they can earn on, say, bonds, they look at the earnings yield (which is the inverse of the PE ratio, i.e., the earnings divided by market price). For example, a domain name with a PE of 5 has an earnings yield of 20%, which may provide an attractive alternative to bonds yielding less than 5%. (3) PE ratios vary across classes. Thus, PE of a traffic domain name selling at 4 is considered undervalued to the range of its peer group with an average PE of 5-7. “Analyzing a domain name’s PE ratio is just another tool borrowed from financial investment analysis that is speeding up the informational efficiency of the domain name secondary market,” says Alex Tajirian, DomainMart CEO. The full report is available at: http://domainmart.com/news/PE_value.htm |
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