Within the technology sector are various industries dealing with very specific products and/or services. One major industry in the tech sector is internet information providers. Examples of major companies within that industry are Yahoo, Inc. and Google, Inc. In addition to those major players are smaller companies with high growth potential.
“In our opinion the dot-com shakeout that began in the spring of 2000 ended in mid
2003,” stated Standard & Poors’ stock research analyst, Scott Kessler, in both Yahoo and
, Google’s January 282006 stock reports. He also noted that many internet companies
were able to cut costs and prioritize their profits through selling low or zero-coupon convertible debt and acquiring weaker competitors.
There is a great amount of competition existing in this industry, yet there are some key diversifying factors between its companies. Their management of costs and technological innovations are at the heart of these differences. Smaller companies in this industry face possibilities of being acquired, but also have opportunities to find their own niche in this broad classification.
It is expected that e-commerce spending will rise from $295.4 billion in 2004 to $1.1 trillion in 2009, amounting to average annual increases of about 30%. This is according to research from International Data Corp. But some companies in the internet-retail sub-industry, such as Expedia, are expected to face dwindling profit margins as shipping costs rise and competition gets tougher.
Yahoo has a strong reputation as being a quality internet information provider. People have Yahoo.com set on default as their homepage and advertisers continue to fill in large spaces on the site. Google has a newer name, but has already generated a strong recognizable presence in the industry. It is common now for people to use the expression
“I Googled that online!” For other new and smaller firms like Knot, inc.’s theknot.com,
it may take large advertising costs and a long time period to achieve such brand identity, thus creating a significant barrier to entry.
As these sites expand, they look abroad for possibilities. However, certain governments like China have very restrictive free speech laws that make operating such an information provider subject to government scrutiny and regulation. Recently as Google reported fewer earnings in 2005’s fourth quarter than analysts had expected, the reason given was in part due to high than anticipated costs internationally.
Also recently in the news is the court battle between Google and the U.S. government which is dealing with the handing over of user information to the government. Google is currently refusing to compromise the privacy of its users, while the U.S. government contends that it needs such information to make anti-child pornography laws effective. It could affect Google’s share price if they lose this case or if they win this case.
Economies of Scale & Start-up Costs
As small, successful sites like Mooter.com are able to demonstrate the fact of their being relatively small start up costs, larger information providers are enjoying their popularity with increased services such as email and larger advertising revenue (Google’s minimum fee per click is $.05 according to its 2004 annual report). However, as a site becomes more popular, the company faces higher costs in making it accessible to a high volume of users simultaneously.
With a current P/E ratio hovering around 40 in this industry, there are serious expectations of growth from its companies. However, Google admits that it does not expect to sustain its remarkable growth rate it has had in recent years. In 2004’s Annual Report, the MD&A cited increasing competition and “inevitable” decline in their growth
rates. Surprisingly, the internet information provider industry is seasonal. Internet usage generally slows during the summer months, and commercial queries generally increase in the fourth calendar quarter of each year (2004 Google Annual Report).
Diversity of Competitors
Within this industry are various sub-industries. To illustrate this industry’s diversity,
Expedia, Inc., which is a leader in travel planning services, is also included in this industry. MIVA, Inc., a performance marketing network that is responsible for private brand toolbars as well as other professional services to small businesses, is classified as an internet information provider as well. Retail sites like Expedia.com are compared to informational sites like Edgar.com. Domestic search engines like Google and Yahoo are also compared to foreign search engines like Baidu.com in China and the increasingly popular rediff.com, which caters to people of Indian decent.
Buyer Propensity to Substitute
There is a high propensity for users to substitute between search engines. However, currently there are not many “good” choices besides MSN, Yahoo, and Google. Also, each of these sites offers different services. Yahoo, for example, offers Yahoo Finance that cannot be found on Google or MSN.
The possibility for new information providers is a reality that these companies are tying to fight as they each differentiate themselves with unique products and services that keep them one step above the competition. Evidence of this is how Google now focuses its energy not on its easily substitutable search engine, but rather is acquiring companies with a unique knowledge of different services such as academic library collections and cell phone compatibility, as well as Gmail and Blogger features.
Services differ immensely within this industry. Mapquest.com varies significantly from Knot.com (a new, extremely popular site for wedding planning). There are many sites that offer specific services that have proven to be solid investments. Others have
achieved success by offering multiple services. Craigslist.com, an online community
bulletin board that started in 1995, now is a popular forum for metropolitan locals for job
posting, dating, events, and furniture & used items. In 2004, E-bay purchased a 25%
stake in the company.
Target users vary by site as well. Briefing.com has investors, eHarmony.com has singles,
BET.com has African Americans, gfn.com has gay financial professionals, and
yahoo.com has just about everybody. Each of these sites has its own core competencies
that add value and make for solid investments.
Google and Yahoo, the two biggest movers and shakers in the industry, have managed to
differentiate themselves. Google, with 3,021 employees, has a cost differentiation
compared to Yahoo’s 7,600 employees. Google has the new Google Earth offers maps and satellite images for complex or pinpointed regional searches, while Yahoo has Maps
Beta that gives detailed driving directions as well as offers in depth information about a
particular area including traffic reports that can be sent to mobile phones.
CHART OF KEY INDUSTRY RATIOS (3/14/06 Yahoo.com)
Net 1 Day Long-Price Price to Profit Div. Price Term to Free Cash Market MarginYield P/E ROE % Description Change Debt to Book Flow Cap % % %EquityValue(mrq) (mrq)
Sector: Technology 0.45 4973.8B 37.71 12.66 1.86 0.77 6.24 9.78 -18.16
Industry: Internet Information Providers -0.37 164.1B 66.80 17.60 1.60 0.05 20.64 21.30 -209.00
COMPANY OVERVIEW: The Knot, Inc.
The Knot, Inc. is a wedding media and services company that provide products and
services to couples planning their weddings and future lives together. It operates in two
divisions, Online and Offline. The online division manages websites that provide future
brides and grooms with a searchable database focusing on wedding planning and
interactive wedding planning tools. Visitors can browse online shopping areas that
feature large items like household appliances and electronics to smaller items such as ring
pillows and table center pieces. For the bride and groom looking to make their wedding
truly unique the website offers the ability to personalize bits and pieces like toasting
glasses, cake servers, napkins, and wedding attendant gifts. The Knot, Inc. has also
launched several brands that target before and beyond the wedding day which include the
teen-oriented PromSpot.com, the newlywed site TheNest.com and the online personals
The Offline division has a diverse collection of print publications. It publishes The Knot
Weddings Magazine semiannually, which is a searchable shopping guide providing
directories of wedding gowns, fine jewelry, china, home products, invitations, wedding
supplies, honeymoon packages, and local wedding vendors. It also authors a series of
books that provide the information to bride and groom needed to plan their wedding.
(Company profile information adapted from Yahoo Finance.)
MOST RECENT MEDIA COVERAGE OF KNOT,INC.
World's Leading Travel Magazine and Leading Wedding Media Company
Introduce Luxury Travel Resource (BUSINESS WIRE)
Feb. 14, 2006--Travel + Leisure, the world's leading travel magazine, and The
Knot, Inc. (www.TheKnot.com; NASDAQ: KNOT), a life stage media company
and premiere wedding resource, today announced a new joint venture: Travel +
Romance. Debuting in April 2006, Travel + Romance magazine will showcase
the best in luxury honeymoons, destination weddings, and trips for two. The
publication's companion web site, www.Travel-Romance.com, also launching in
April, will be the first and only site to focus on luxury romantic travel.
AMERICAN EXPRESS AND THE KNOT, INC. LAUNCH UNIQUE CREDIT
CARDS DESIGNED SPECIFICALLY FOR ENGAGED COUPLES AND
NEW YORK, December 01, 2005 -- American Express and The Knot, Inc., today
announced a strategic partnership with the launch of two new co-brand, fee-free
consumer credit cards, The Knot Credit Card from American Express, developed
for couples planning their wedding, and The Nest Credit Card from American
Express, designed specifically for newlyweds.
“Given that engaged and newlywed couples are spending over $70 billion a year
in this life stage, it's about time there's a credit card with core benefits that cater to
their needs and specific interests for this time in their lives,” said Beth Lacey,
senior vice president and general manager, American Express Strategic Alliances
and Cobrands. “We are thrilled to be partnering with American Express to launch
this innovative service for our engaged couples and newlyweds,” said David Liu,
CEO of The Knot.
Timeline of Significant Events:
September 1996 The Knot launches on America Online (AOL keyword: knot).
The Knot launches on the Web at www.theknot.com.
November 1998 The Knot launches a full-service online gift registry, the first of its kind.
The Knot Gift Registry expands its wide-ranging selection of gift items to more than 10,000
December 1999 The Knot raises $35 million in an initial public offering.
February 2000 The Knot acquires Weddingpages, Inc.
September 2000 The Knot announces strategic marketing and retailing partnerships with Linens 'n Things and
The Knot announces content distribution deal with Yahoo!
February 2002 The Knot receives $5 million strategic investment from The May Department Stores Company
and announces marketing alliance to promote the online gift registries of The May Department
The Knot brings Real Weddings from The Knot to the television screen on The Oxygen Network.
September 2003 The Knot's "Bridal Fashion Preview" televised special airs on The Oxygen Network
iVillage, Inc. operates various online and offline media-based properties for women. Its
properties include the iVillage.com, Women.com, gURL.com, Astrology.com,
Substance.com, Promotions.com, Healthology.com, and GardenWeb.com Web sites. The
company also provides Web site creation and development services to healthcare related
organizations; digital commerce platforms creation and development services; consumer
products offerings, consisting of an iVillage-branded book series; and informational and
instructional magazines, custom publications, television programming, videos, and online
properties of interest to expectant and new parents. The company also offers research
services measuring brand awareness and the attributes related to purchase decisions to its
sponsors, advertisers, and other customers.
THIS JUST IN….
NBC Universal to Acquire iVillage Inc.; Top Women's Online Community to Be
Centerpiece of NBCU's Digital Strategy
NEW YORK--(BUSINESS WIRE)--March 6, 2006--NBC Universal and iVillage Inc.
(NASDAQ:IVIL) have signed a definitive agreement for NBC to acquire iVillage, one of
the nation's most successful online destinations for women.
INDUSTRY & KNOT: S.W.O.T. ANALYSIS
? Low entry barriers as there are relatively small startup costs. “The cost of starting
a Web-based company is plummeting,” says Keven Maney in his June 7, 2005
article in USAToday Online. “Some in the industry estimate starting an Internet
company today costs one-tenth or even one-fifteenth what it did just five years
? Diversification between companies.
? Constant innovation
? Over one million subscribers to theKnot, and growing.
? Market niche in wedding related services.
? High volatility. Volatility implies risk and internet stocks do typically have
? Reliance on advertising revenue. 99% of Google’s 2004 revenue was from
? Decreasing inventory turnover.
? Knot appeals mainly to women – needs to diversify its target audience.
? Foreign investment.
? Advancements in cell phone technology. Some companies have made web
content formatted to smaller screens available to subscribers.
? Web lobs (Blogs). According to Yahoo’s industry profile, “The 2004 presidential
election brought blogging into the mainstream parlance as both partisan and
independent commentators managed to scoop many traditional news outlets.
Blogs operated by active military personnel are providing a unique and unfiltered
view of the war in Iraq.”
? Strategic Alliances with retail businesses.
? Government regulation. The Digital Millennium Copyright Act, Children’s
Online Protection Act, Children’s Online Privacy Protection Act, and other
similar laws are always subject to violation if the company is not careful.
? Competition with iVillage.com, or other companies like weddingchannel.com
Sustainable Free Cash Flow from Equity (FCFE) growth in the accompanying FCFE analysis is assumed to be 12.5%. This is because of the following reasons: This year,
“Analyst Estimates “on Yahoo Finance predict that the growth in S&P will be 12%. This
year, KNOT’s growth is predicted to be a whopping 125%; next year is forecasted at 64%
and the rate for the next five years is 43%. When determining this assumption, it was
decided to err on the side of conservative predictions – weighing the S&P’s predicted return most heavily.
KNOT experienced Sales Growth of 24.5% in 2003, 12.81% in 2004, and 24.18% in
2005. The average of these three years’ growth is 20.5%. As the company gains more
exposure, it is predicted that sales will grow even further. Yahoo predicts a 22.5%
growth for 2006. The accompanying FCFE analysis starts off with a slightly more
aggressive growth rate of 25% for 2006 and 2007, but recognizes that the company will
mature quickly as its market is only so big. Therefore, the growth rates are assumed to
still be increasing, at a decreasing rate, by 20%, 18%, and 15% for 2008, 2009, and 2010,
Cost of Goods Sold (COGS) is represented as a percentage of sales. Looking at the
previous four years of data, COGS have been 35%, 32%, 27%, and 22% most recently.
When analyzing this, along with many other expense items on the Income Statement, it
was determined that a four-year weighted average of these percentages, with the most
recent year being weighed heaviest and the oldest year weighed least, would be a better
estimate to use for the assumption for the pro-forma financials and subsequently the
FCFE analysis. The weights are the following: 40% for 2005, 30% for 2004, 20% for
2003, and 10% for 2002. Using this technique, the assumption for COGS as a percentage
of sales is a consistent 26%.
The assumptions for Research and Development (R&D), Selling General and Administrative (SG&A), and Depreciation/Amortization followed the same method as