An Overview On The Domain Names Sector

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Includes: EIGI, GDDY, MLBEF, NAME, TCX, UDIRF, VRSN, WEB
by: Plexor

Summary

My findings and personal opinions in respect of value on some companies belonging to the domain names sector.

Value opinion on the domain names sector based on DCF analysis.

Check of value opinion on the domain names sector based on proprietary 'what-if' analysis.

About Domain Names

Domain names are unique names that identify websites. When you access a website, the domain name is dynamically translated to an IP address by a service called Domain Name System (DNS). Ensuring the security and stability of the DNS is among the key responsibilities of the Internet Corporation for Assigned Names and Numbers (ICANN). Domain names are organized in subdomains of the root domain (represented by a never shown single dot). The first-level set of domain names are the generic top-level domains (.com, .net, .org, .info, .edu, .name, ...) and the country code top-level domains. Some domain names are supported by an organization or community (sponsored top level domains) which means that their registration is restricted (.museum, .xxx, .jobs, ...). In June 2011 ICANN authorized the launch of the new gTLD Program to enhance competition and consumer choice. Under the program ICANN is executing registry agreements with new gTLD applicants awarding over 1,300 new gTLDs in an initial round. On October 2013 the U.S. Department of Commerce began to authorize the delegation of the new gTLDs.

Domain names are somehow pieces of digital real estate. In my view you may think to .com .net and .org web sites and country code top-level domains as the most luxurious locations of these digital real estates (the former may be compared to offices while the latter to houses and finally new gTLD to real estate properties in less prestigious locations).

On the long run, the use of domain names to access the web may be threaten by Internet users' practices of shifting away from directly typing in web addresses by using social networking and microblogging sites. Internet users are also decreasing the use of web browsers in favor of applications to locate and access content.

The following peers companies have been considered into this analysis

GoDaddy Inc. (NYSE:GDDY): a leading technology provider of cloud-based products to small businesses, web design professionals and individuals, operates the world's largest domain marketplace. They provide website building, hosting and security tools to customers.

Tucows Inc. (NYSEMKT:TCX): a Canadian company which provides services that help people in domain name registration, email and mobile phone service.

Endurance International Group Holdings Inc. (NASDAQ:EIGI): a provider of cloud-based platform solutions designed for small and medium-sized businesses (domains, website builders and hosting, email, security, storage, site backup, search engine optimization and marketing, social media services, website analytics, mobile device tools and e-commerce solutions).

Web.com Group Inc. (WWWW): a provider of Internet services to small businesses (subscription-based solutions including domains, hosting, website design and management, search engine optimization, online marketing campaigns, local sales leads, social media, mobile products and e-commerce solutions).

Rightside Group Ltd (NASDAQ:NAME): a provider of domain name services to businesses and consumers to build their entire online presence.

Melbourne IT Ltd (OTC:MLBEF): an Australian based provider of managed services and business grade cloud applications to local corporate and government clients. It offers customers domain name registrations and renewals, website and email hosting, website design services, online marketing, website security, and online tools and solutions. It also supplies online business services to a global network of reseller clients.

Verisign Inc. (NASDAQ:VRSN): a global provider of domain name registry services and Internet security. They ensure the security, stability, resiliency and operation of key Internet infrastructure and services. They are the exclusive registry of domain names within the .com, .net and .name gTLDs under agreements with ICANN and also, with respect to the .com agreement, the U.S. Department of Commerce.

United Internet AG (OTCPK:UDIRF): a German based company provider of: fee-based, fixed-line and mobile access products and applications for consumers and small businesses, such as home networks, online storage, telephony and video on demand and business products with data and network solutions; infrastructure services for large corporations; applications which include domains, websites, webhosting, servers and e-shops, Personal Information Management applications, group work, online storage and office software.

The following are my findings and personal opinions in respect of value as of the 30th of April 2015.

Endurance International Group Holdings Inc.

Increasing revenues during at least the last 5 Ys. FY2014, first year of operating income. At least 5 Ys. of net loss. Strong OCF compared to previous years. Low Z-score. High debt/equity. Pays no dividend. Apparently fairly valued but some commentators have recently raised earnings as suspect. (Share price: $18.33 on 30 Apr.2015).

GoDaddy Inc.

At least 5 Ys. of operating loss (but improving) and net loss. Pays no dividend. Low Z-score. High debt/equity. Almost fairly valued. (Share price: $24.88 on 30 Apr.2015).

Melbourne IT Ltd

Strong improvement of revenues after almost 4 Ys. of declining revenues. At least 5 Ys. of operating and net income. Low debt/equity. Pays dividend. Z-score fine. Undervalued. (Share price: AUD 1.36 on 30 Apr.2015).

Rightside Group Ltd

At least 5 Ys. of improving revenues. Operating and net loss during last 3 Ys. Low Z-score. Low debt/equity. Pays no dividend. Overvalued. (Share price: $8.99 on 30 Apr.2015).

Tucows Inc.

Growing Revenues and operating income during at least last 5 Ys. At least 5 Ys. of net income. High Z-score. No debt. Pays no dividend. Apparently undervalued but issues with material weaknesses in internal control over financial reporting identified by the company itself in the last 10-K form. (Share price: $17.67 on 30 Apr.2015).

United Internet AG

Operating and net income and growing Revenues during at least last 5 Ys. High Z-score. Debt/equity ratio acceptable. Pays dividend. The Operating cash flow was computed without taking into consideration a capital gains tax payment arising from an intra-group dividend that the Company said will be refunded. Overvalued. (Share price: €39.21 on 30 Apr.2015).

Verisign Inc.

Revenues and operating income increasing during at least last 5 Ys. At least 5 Ys. of net income. Pays no dividend. Z-score just satisfactory. Debt is 1.9x revenues, 3.2x operating cash flow but net debt is not far from zero. Apparently almost fairly valued but presents worsening Stockholders' deficit since last 4 Ys. (Share price: $64.14 on 30 Apr.2015).

Web.com Group Inc.

Increasing revenues during at least the last 5 Ys. First year of operating income. At least 5 Ys. of net loss. Pays no dividend. Low Z-score. High debt/equity ratio. Undervalued. (Share price: $18.81 on 30 Apr.2015).

Value opinion on the DOMAIN NAMES sector based on DCF analysis

To reach the fair value of this bundle of stocks compared with its market price, the following steps were conducted:

· the added free cash flows of this bundle of companies (considered as a whole) have been projected to the future and discounted back by employing as weighted average cost of capital: a) The average of each single company WACC weighted for market capitalization; b) The average of each single company WACC;

· the sum of the operating leases and stock options for each company have been estimated and subtracted from the total market value of equity;

· the appropriate short/medium and long term FCF future growth rate of the bundle [a) Weighted for market capitalization; b) Un-weighted for market capitalization] has been estimated by looking back into the financial reports of each target company to see how it performed in the past. With the bundle meaningful enough, then the entire DOMAIN NAMES sector's under-valuation might be inferred. The resulting figures are as follows (millions of dollars):

a) (Weighted)

FCF ttm: $ 1,320 M | WACC: 10.3% | short-medium term FCF growth rate: 9.4%

Long term FCF growth rate: 2.8% | Value of Cash, Marketable Securities & Non-Operating Assets:

$ 2,196 M| financial debts: $ 6,619 M | estimated value of operating leases and stock options: $ 709 M.

The final computed figure gives an estimated result of fair value of the bundle of companies equal to $ 25,426 M, which compared to the current (30 Apr. 2015) market price of around $ 24,007 M, shows an undervaluation of almost 5.6%.

b) (Un-weighted)

FCF ttm: $ 1,320 M | WACC: 8.8% | short-medium term FCF growth rate: 8.8%

Long term FCF growth rate: 2.8% | Value of Cash, Marketable Securities & Non-Operating Assets:

$ 2,196 M | financial debts: $ 6,619 M | estimated value of operating leases and stock options: $ 709 M.

The final computed figure gives an estimated result of fair value of the bundle of companies equal to $ 31,794 M, which compared to the current (30 Apr. 2015) market price of around $ 24,007 M, shows an undervaluation of almost 24.5%.

Financial soundness, measurable by the Altman Z-score index*, has resulted in a moderate aggregated value equal to 2.37 (weighted) and 2.09 (un-weighted) which both stand in the "grey" zone.

*The Altman Z-Score is a measure of bankruptcy risk not based on stock price volatility. It segments companies into three groups: "safe" (Z-score > 2.99), "grey" (Z-score between 2.99 and 1.81), and "distressed" (Z-score < 1.81), and may be useful for identifying bankruptcy risk in the coming years. It is based on financial statement data and market capitalization.

Check of Value opinion on the DOMAIN NAMES' sector based on proprietary WHAT-IF analysis

WHAT-IF

This is a model (PEA Peers Evaluation Analysis) that is based on some basic assumptions, which makes it rational and useful, even if cannot be taken as a standalone evaluation method. Indeed it isn't precise, nor specific, but may be useful to gather some important evidence from comparisons. However, a major drawback of this model is that a company may operate in different fields at the same time which makes it difficult to be assigned to a specific bundle.

The main assumption is that if we take a bundle of companies belonging to the same business field on the long run, each single company will tend to reach the same average financial metrics (otherwise they will exit the market). The same assumption must be true also for new entrants. In practice, fundamental ratios from profit and loss, balance sheet, and cash flow statements, as P/S price to sales, P/EBIT price to operating income, P/E price to earnings, P/BV price to book-value, as well as P/FCF price to free cash flow, should lean towards the average bundle value in the long term. A further assumption of the model answers the question: what if? What would be the price of a peer company if its fundamental ratio is the average one? This price is then computed for each ratio and the next step is to find out the average price of the results. This final figure is the one to be compared with the stock price to gain a sense of potential over/under/fair valuation.

Due to the specificity of the bundle of companies chosen here the P/E ratio has been excluded from the model and main average values have been computed discharging extreme or anomalous values (in grey). Moreover P/OCF has been used instead of P/FCF.

THIS ARTICLE DISCUSSES MY OPINION AND REASONABLE EFFORT HAS BEEN USED TO ENSURE ACCURACY OF THE INFORMATION PROVIDED. HOWEVER, THERE MAY BE INACCURACIES DUE TO HUMAN OR OTHER ERROR. THOSE INACCURACIES INCLUDE, BUT ARE NOT LIMITED TO, INCONSISTENCIES, OMISSIONS, AND SPELLING MISTAKES. NO RESPONSIBILITY IS ASSUMED FOR ANY ERRORS OR FOR THE CONSEQUENCES OF RELYING OR ACTING ON THE INFORMATION PROVIDED IN THIS ARTICLE. IN NO EVENT WILL THE CONTRIBUTOR BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES, NO MATTER WHAT THE CAUSE.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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