Domain names like vodka.com (sold for $2mm this year), business.com (sold for $7mm), sex.com (sold this year for $12mm) and even a misspelled word like mortage.com (sold for $242,000) are part of the land grab of the 21st century. Following the fortunes of the companies that are stockpiling domain names or are the arms merchants of the domain name business is well worth your while regardless of the economy. The Internet is only going to get bigger and domain names are the keys to the kingdom if you want to do business there. And supply is diminishing every day. In this article I’m going to cover the top public companies that are stockpiling domain names and building up real tangible value on their balance sheets without any of Wall Street really being aware of it. But first, a detour:
To find out more about domain names I called Bob Chapman, founder of activist hedge fund Chapman Capital. I’ve written about Chapman many times in the context of his activist holdings. Bob is a story unto himself: he had great returns for many years, broke his back surfing, quit the hedge fund business, traveled the world 3 times over, and has now made a great comeback over the past year. As much as Bob hates this (he doesn’t like investors to piggyback his positions): here are his top holdings. I’ve been following his activist play on CY (see his portfolio page for details) among others.
But what does this have to do with domain names? Turns out Bob’s been buying them for a decade: “In March, 1996, it was obvious to me that .com was beachfront real estate available for lease at $35/year,” he told me, “A true no brainer," he told me.
I asked him if he had received any offers for any of the domain names he owns.
"Yes," he said, "but they were not bought with an intent to sell for a
profit. I wanted to use them. Several telco service operators have
offered me over $3 million for calls.com so they could compete against Skype but
I am holding out for a much higher price given my view that all calls
are going to be made over the Internet in the next ten years, and
calls.com is the hotels.com of that space."
Bob owns, among other names, sherry.com, helmet.com, hedgefunds.com, and takeovers.com.
The Domain Name Index on Stockpickr has three largecap or madcap companies with good domain name portfolios and businesses and three smallcap or microcap companies with many domain names among their assets. Here are the largecaps.
VRSN
The granddady of the domain name business is Verisign, which is the provider of all the .com and .net domain names. All of the registrars are simply reselling the domain names they acquire through Verisign. If you go to register.com for instance, and buy a domain name for $30 a year, you’re actually paying VRSN $6 a year at the base of that transacation. VRSN has a clean balance sheet with $500mm in net cash and trades for just a little over ten times cash flows.
GoDaddy.com is one of the biggest registrars of domain names out there. You can catch their Superbowl commercials every year during the game. They recently filed to go public but they were making so much cash hand over fist they decided not to. But now Google just recently signed a deal with them to resell domain names to small businesses through GoDaddy. This further cements Google’s symbiotic relationship with their small business customers and will allow them to resell advertising services, gmail, and even the so-called “Google Office” that is starting to come together.
Marchex was started by former Go2Net founder and CEO Russ Horowitz. They own over 200,000 domain names including the domains for every zip code in the country. Marchex trades for just a little over 10 times cash flows (enterprise value over EBITDA) and had year over year revenue growth of 26% last quarter.
To see the other three stocks in the Domain Name Index check out its portfolio page.
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