Tuesday, December 21, 2004

SELL WB? HOLD GOOG, YAHO, TWX, AMZN, EBAY!

In three earlier posts this morning, I showed that WB is not my favorite stock. Further investigation would show that WB is a conservative bank and is not nearly as levered to the yield curve as many banks. Without looking at any financial data, I am confident that most of WB's loans are floating rate loans tied to short interest rates or that the durations are on average short-term. Conservative banks have worked for twenty years or more to earn less from spreads and more from fees. I simply pick on WB because it is a favorite of quite a few of my regular readers.

One might ask, How can you suggest the sale of WB while holding so many "over-valued" internet stocks? Yes, after the addition of more shares at $171 and the latest move, GOOG is one of my top three positions and EBAY and YAHO are in my top ten. Even AMZN has been very good to me. I have a nice profit in TWX but it may be the only "value" play of the bunch.

The answer is that I believe the numbers posted by Bambi Fancisco of CBS.MarketWatch.com. Here are her key points:

1. Keyword advertising is expected to grow at compounded rates of better than 20% to over $19 Billion in 4 years. GOOG and YAHO will get the biggest portions.

2. On-line shopping appears to have risen by more than 30% again this year. AMZN and all the others listed will benefit. The market mavens who have been negative toward AMZN have talked about the slowing of on-line shopping. Bah-Hum-Bug! Those who study the second and third derivatives sometimes out-smart themselves. On-line shopping will grow faster than brick and mortar shopping for many years to come. The rate of growth will naturally decline but so what! Only fools try to pop in and out of these fast growing companies.

3. Only 3% of total advertising is on-line advertising. Wow! The irony is that the growth is slowed by the efficiency of the advertising. Ads are delivered primarily to those who are interested in that particular ad. Think for a moment of how many new pages will be available for advertising as whole libraries come on-line. The beauty is that folks do not mind advertising that is non-obtrusive and relevant to their lives. Those who read books about pets want to know about special deals offered by the local pet shops or about shows or whatever. Those who read investment books want to click on a link to find this blog.

A firm that measures web ad effectiveness is Net Ratings. The chairman was a guest on Kudlow and Kramer recently. It is clear that a firm like Net Ratings can help target ads to the exact audience. I have not studied the stock but my gut feeling is that I should be an investor.

In the same piece, Fancisco expressed concerns about high valuations. One example she cited was the purchase of rent.com by EBAY for 10 times revenues. I too am concerned that EBAY may have over-paid. We know EBAY is good at auctions and at on-line payments. We owners do not need for EBAY to have a third front but if there is a solid profitable business to be built then go for it. One blogger says investors should buy Homestore.com. He says that if Rent.com is worth 10 times revenues then surely HOMS is worth more than 2 times revenues. NOT FOR ME!

I try to avoid buying shares in companies that are facing direct competition from the biggest bear in the woods. I don't care if IACI "might" buy HOMS because they "might not". (I recently sold my CC partly because Best Buy is the grizzly bear of tech retail.)

EBAY purchased a 20% share in Craig's List some months ago and is clearly planning to be a major player in classified advertising. HOMS may be cheap and EBAY may have over-paid for Rent.com ($400 million) but my bets are on EBAY. EBAY has such a strong core business that it can afford to attack a new area like a bull in a china shop. Short-term, "profits" from rent.com or Craig's list are not important to EBAY. I suspect EBAY will build the largest most easily searched classified site on the web. The day will come when everyone will be aware that the place to get top exposure for your ad will be through EBAY. The consumer who wants to rent a house will automatically want to check what is available on EBAY. I do not own Craig's list but am confident that it will be one a long-term beneficiaries of its relationship with EBAY.

One interesting question is the model EBAY will follow. Craig's List and Rent.com use totally different models. EBAY may depend on paid listings, advertising or both. Chances are that EBAY will achieve economies of scale and many smaller players will have a hard time competing. EBAY has traded down since the purchase. Don't overload on high priced internet plays but if you don't have them, this is a buying opportunity.


1 comments:

Retta Matson said...

Ebay is dependent on advertising? Paid listing? Or on some other element?
GOOG