I like Australia’s listed internet businesses. Jobs (Seek), car sales (carsales.com), property (REA Group) and hotels (Wotif) are all markets that demonstrate extremely powerful network effects. The more people that visit the sites looking for jobs, cars, properties or hotels, the more sellers want to use the sites to sell jobs, cars, properties or hotels. The more sellers, the more use it is to the customers and hence more traffic. On and on we go until your website is worth more than a $1bn.
The economics of these businesses are mouth-watering. Minimal capital requirements; which means all the profits can be paid out as dividends. But high barriers to entry thanks to the network effects outlined above. What’s more, in many cases (jobs being a notable exception), the progression from offline purchasing to online purchasing is far from complete.
The problem is that these attributes are plainly obvious to everyone and the shares come with an appropriate price tag. The big four are all sporting price to earnings multiples of 30 or more.
There is, however, one exception. Back in November and December I spent a few days working on Webjet, a listed online travel agent. I’ve followed the business for a number of years and it displays all the economics of its listed online counterparts: prodigious cashflow; minimal capital requirements and rapid growth.
But Webjet wasn’t trading on thirty-something times earnings. The asking price was 16 times and the company had already announced that turnover in October was up 50% on the prior year. It wasn’t too difficult to look 12 months down the track and see a rapidly growing business that you’d bought for 11 or 12 times 2010 earnings.
But I didn’t buy the stock. And it wasn’t because of stock exchange announcements headed ‘Webjet growth rockets!’ (no, the exclamation mark isn’t mine). It’s because I don’t understand why anyone uses the website.
Webjet is an aggregator of flights. You can go to the site, search for a flight from Brisbane to Melbourne next week, for example, and Webjet will show you all the fares from Australia’s four domestic airlines. Then you can choose which flights you want and book them through Webjet for a $30 fee (including the $10 ‘price guarantee’ fee). Or, you can choose your flights and book them through the airlines’ own sites for free.
It takes me less than a minute to search for the same fare I’ve found on Webjet on an airline site, so an economically rational person would need to value their time at $1,800 per hour to justify the convenience of booking through Webjet (if your time is worth that much, you should be paying someone to book your flights). Or perhaps people don’t realise they are being charged the extra $30. The fees aren’t immediately obvious, I must admit, but when I select two $100 flights and get charged $230, I’m soon asking questions.
I was that exasperated about my lack of understanding that I rang Webjet and asked them directly about the customer proposition. ‘People use us’, they told me, ‘because we offer a valuable service’. Really? They pay you $30 out of the goodness of their hearts? ‘Oh’, he went on, ‘and we offer a 24/7 help desk’.
Can someone please put me out of my misery? The stock price is up 30% since I was looking at it but you only need two more years of growth like this for it to still be exceptionally cheap. Please, please, please, why do people use Webjet?
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.