Feature Stories | Jun 06 2006
By Rudi Filapek-Vandyck
Let’s start with the theory. Some experts believe new technology, any new technology, develops the same way as we tend to write a capital S. Assuming one starts from the bottom, not from the top, this implies that new technology requires a relatively long incubation period.
During these early stages the new invention mostly stays within a circle of geeks and nerds and the few enthusiasts developing it. It is not until a certain degree of maturity has been achieved that a bigger slice of the general public will learn about the new invention, often heralding a first boom period for what until that point has been nothing more than a marginal event, hidden in the shadows of modern day society.
Applying the S-curve theory to what is commonly known now as the internet, this first incubation period would probably run from the late eighties when a few US libraries started to link up their computers and allow for rudimentary communication to the mid-nineties when the first browsers and email programs found their way to a wider audience across the Atlantic.
The opening up of the new technology gave way to a few years of very strong growth of both general awareness and new applications. Further development then accelerates as more and more entrepreneurs see the opportunity. We have landed in the few years of sheer euphoria that came to a brisk end with the technology meltdown at the beginning of the new millennium. In terms of the S-curve, we have just experienced the first curly movement up, after which an extended period of unspectacular growth follows.
We have landed in the internet era post Nasdaq meltdown. People have waved goodbye to blue sky promises, many have grown sceptical, but the technology is too far advanced to die a silent death. It develops further and finds an ever growing audience while new and better applications add to its increasing reach. This is why the S-movement is still moving upwards. It is during this stage that our new technology is reaching the masses.
The next movement will be a strong upward one as we are approaching the second curve of the S. It is in the same breath the last period of strong growth the new technology will experience during its life time. Once the second curve has become a fact the final stages of maturation kick in and future growth will only be gradual and eventually even trending down.
Assuming the theory holds its merits in daily practice the internet should now be moving towards its second boom era. In fact, some commentators believe we are already at the early stages of the top curve in the technology’s S-shaped development. For investors this means this is the last chance you’ll ever get to make large and relatively easy gains from investments in the sector.
The theory is greatly supported by the awakening of countries such as China and India to the online world of search, blog and email. Adding a potential audience in excess of 2bn users to any new technology has to automatically herald a new era of unusually high growth, one would assume.
One of the companies at the forefront of today’s internet development, as well as in hooking up potentially 1.3bn Chinese citizens, is US based Yahoo!. The company recently gave a presentation to US investors during which the Chinese growth potential was discussed.
According to information provided at the presentation, Chinese internet users are forecast to increase from 111m in 2005 to 159m in 2007 (up 43%). Probably even more important, B2B (business to business) eCommerce in China increased from US$17bn in 2003 to US$64bn in 2005, an increase of 276% with ongoing strong growth forecast for the coming years.
Chinese Consumer eCommerce measured in gross merchandise volume increased from US$1bn in 2004 to US$2.4bn in 2005 (that’s up 140%). Equally important for the likes of Yahoo! is that online advertising in China is projected to increase from US$287m in 2004 to US$1.37bn in 2008 – a projected increase of 477% over four years.
The internet doesn’t necessarily need China and India to help make the next upward curve a sharp and steep one: market experts are currently estimating a 24% CAGR (compound annual growth rate) for online advertising in the US between 2005 and 2008. For the worldwide web outside the US the growth figure should be close to 30% for the same period.
Sure, there are other sectors of the global economy that have similar prospects, but to many CEOs of today’s leading companies these figures are nothing more than a dream.
We don’t need Yahoo! projections to convince ourselves of the significant growth that lies ahead for today’s internet companies. Simply think about all your friends and acquaintances who as recently as five years ago hardly used their free hotmail account and who nowadays send you daily emails, ask about whether you have heard about Skype (doh!) and even tried their luck at eBay and Amazon.com.
According to expert estimates, total internet users worldwide had grown to over one billion in 2005. The number is projected to grow to 1.7bn by 2010. In financial terms this represents a CAGR of 12% per annum.
Future growth of internet users as well as for online advertising and user applications is considered to go hand in hand with the globally increasing penetration of broadband internet connections. In addition, industry estimates are for a total of 900m PCs worldwide plus some 2bn mobile phones, many with internet access.
Meanwhile the nature of the global internet community is changing rapidly with the non-US user audience growing at a very fast pace. The US was estimated to account for 39% of total internet users in 2000. The number had shrunk to 22% in 2005. By 2010 it will have fallen to circa 16%.
Australia and New Zealand have less developed internet businesses than in the US, but we were quicker in taking up the technology than China. As a result the projected growth should be somewhere in between the two.
Online advertising across the Tasman is growing at a compound annual growth rate of circa 50%. On-line advertising in Australia grew 65.3% year-on-year in the March quarter of 2006. Total spend was $195m, but the tip is that if the growth rate continues, on-line spend for 2006 could reach $1bn.
Apart from the usual suspects such as Seek (SEK), traditional media companies such as Fairfax (FXJ), Publishing and Broadcasting (PBL) and News Corp (NWS) should reap the benefits from this as well. The main question remains, of course, to what extent this growth will eat into their more traditional publishing operations. On Merrill Lynch estimates, by FY08 online will account for some 19% of total Fairfax’ earnings.
The advertisement switch is likely to eat into the revenues at traditional television operators as well.
Unfortunately, for Australian equity investors, the local investment community has all but abandoned the public internet sector, preferring to add an increasing amount of mining and metals specialists to the expanding teams of securities researchers instead.
This means that local internet companies, with the exception of Seek, remain largely under-researched and many of these stocks have daily trading volumes that show just that. It hasn’t stopped Australia’s largest last-minute accommodation website Wotif.com (WTF) from making a spectacular share market debut on Friday. Wotif.com managed to raise $172m and saw its share price surge 66% to $3.32 on its first day as a publicly listed company.
Many of today’s internet companies, although still relatively small in the greater scheme of things, have solid profits to report amidst a buoyant industry outlook. Industry researcher IDC, for instance, estimates that Australia’s managed web hosting market will grow at a compound annual growth rate of 29% from 2005 to 2008. Listed companies such as Hostworks (HWG) and WebCentral (WCG) should benefit from this.
According to MicroEquities, Hostworks should report a net profit increase of more than 150% this year.
WebCentral will soon be taken over and integrated by former dotcom darling Melbourne IT (MLB). The combination should make for some strong growth figures over the next few years. Select Equities rates MLB Marketperform/LT Outperform.
But probably the best example of the new internet boom is provided by Emitch (EMI). The online ad buyer recently acquired The Internet Bureau in New Zealand and is now the undisputed number one on both sides of the Tasman Sea. More importantly, the two brokers that do cover the stock, Intersuisse and Select Equities, are equally bullish on the company’s prospects with EPS growth for next financial year estimated at 117%.
Emitch shares jumped from 61 cents to 72 cents over the past two trading days. No doubt, this is an example of what some expert research in combination with up to date reporting (FN Arena News) can do for ASX-listed companies.
FN Arena intends to follow the sector closely in the near future.
Wotif.com shares closed at $3.35 on Tuesday amidst a trading volume of 4m shares. This level of market interest most peers can only dream of, even if their share prices are much lower valued.