The Internet Is Alive and Well (as an Investment)

James Altucher penned a column in today's WSJ titled The Internet Is Dead (As An Investment). James is a fund manager and well read columnist on investing and he is entitled to his opinion. He puts his money where his mouth is. But so do I and since we continue to invest heavily in the Internet, I thought I'd take the opposite side of this debate.

We (my partners and I at Union Square Ventures) think the Internet is one of those transformative technologies that changes everything. We see it like the industrial revolution or the invention of the printing press. It is a huge game changer. The Internet has been a commercial technology for about fifteen years now. And we are beginning to see the impact of it on everything around us. The industrial revolution and the Renaissance before it lasted a century or more. It takes a long time for such fundamental changes to work their way through the system and produce a new "normal".

Periods of great change produce fantastic investment opportunities and also destroy stable predictable businesses. Investors have the choice to take a chance on the new opportunities, stick with the stable predictable businesses, or sit on the sidelines. I prefer to do the former.

James says:

Nobody can figure out a business model. Time Warner would rather keep their legacy old-media businesses like People magazine than hold onto one of the biggest Internet companies out there, AOL. And News Corp. is shaking up its MySpace business as it figures out its next steps... Microsoft has spent billions on Internet strategy without a dime of profit.

These are the "stable predictable businesses" that might be destroyed by the changing dynamic. I am not saying they will be. But they could be. The fact that Time Warner (TWX) is selling AOL and holding on to magazines doesn't convince me that it is going to be a long term survivor. AOL itself is a business that has been negatively impacted by the Internet. AOL was never a pure Internet business. It was a dial-up access business connected to a proprietary online service.

And James goes on to say:

even Google can't seem to find any other business model other than the one they stumbled into when they bought Applied Semantics in 2001 that had a little piece of software called AdSense. And the new guys: Twitter and Facebook are still scrambling for profits despite blistering usage growth.

I'll leave Twitter out of this because it is too close for comfort. But Google (GOOG) can easily monetize its huge and growing apps business (which is a huge threat to Microsoft (MSFT)) and also its local franchise. Who doesn't use Google Maps these days? And Facebook is going to produce $550mm in revenues this year, is EBITDA profitable, and has a self serve ad system that is growing like weeds and giving local advertisers the best local targeting around right now.

And what about Amazon (AMZN), eBay (EBAY), and Craigslist? And international businesses like Baidu (BIDU), Lastminute, Vente-Privee, Tencent (TCEHF.PK), and Sohu (SOHU)? There are easily a dozen and probably two dozen worldwide Internet businesses that investors should own today and for the long haul.

I expect that number will grow over the next couple decades to include hundreds of large global Internet businesses that investors can own and make money with. Yes, barriers to entry on the Internet are low and there are no regulated monopolies that James likes to own. But network effects, data leverage, and scale are huge economic advantages online and if you look for businesses that have them, you can and will make a lot of money as the Internet revolution changes business, society, and the world around us. I think you have no other choice other than keeping your money under your mattress.

Comments

[Ricard:]

I read that article in the WSJ, and thought it was 3-4 years late in its call - it seemed to merely equate the Internet with the latest style of investing, where attention spans are short and patience shorter. It's times like these that I wonder why I pay an annual subscription for it.

Although I fully agree with the points in this rebuttal piece, a path to investing remains unclear. All I can see are CSCO and INTC (that are attractively valued)...if anyone else has any ideas I'm all ears.

Jul 19 04:10 PM

[artkarl:]

I think the writer is ignoring traditional P/E in favor of the wide speculative opportunity in the web.

Jul 20 12:17 PM

[taxed2much:]

I did see a street video where Altucher was recommending SOHU about three weeks ago.

Jul 23 11:27 AM

[Ricard:]

SOHU does look a lot better than BIDU, thanks for the tip.

I'm favoring a fundamental approach to tech - only those with the strongest fundamentals will be able to fully capitalize on any weakness in competitors. I was in CIEN, but am now looking for companies that are better positioned in both industry and capital, and in SOHU's case, location.


On Jul 23 11:27 AM taxed2much wrote:

> I did see a street video where Altucher was recommending SOHU about
> three weeks ago.

Jul 25 04:21 AM