It appears that my first article on Dark Blue Sea (DBS) has sparked a lot of interest and just as many questions about different ways of valuing the company. I thought that it would be worthwhile going through some of my thoughts on how I view and value DBS.DBS currently has 82,369,287 shares and based on yesterday's share price of 26 Australian cents this gives the company a market value of $AU21.4m or $US17.12. This is very low from the lofty heights last year of nearly $AU100m. Valuing DBS from a market perspective is one thing but there are other ways of building a valuation and the difference between those ways and the market capitalization is the potential opportunity of the share. For example, if we were to value DBS purely upon their portfolio of 600,000 generic domains then given the current market cap each domain is worth $21.4m / 600,000 which turns out to be $35.66 per domain! One of the nice things about being a domain owner is the fact that we instantly recognize that this would be the bargain of the century especially since the valuation has effectively meant that the rest of the company is worthless.
So what's a generic domain worth if we were to liquidate all 600,000 domains across a six month period? My guess and it will be a guess is that you could probably fire sale the domains at an average of $150 each. Given the recent sale of one of their domains for $250K this would mean that a great deal of domains would be sold for substantially less than $150.
If this were the case then solely based upon this average price DBS has a market cap of $AU90m or a share price of $AU1.09 This back of the envelop valuation methodology is one of the reasons why I believe that DBS is a buy.
In fact, you can see some of the domain "stock item" strategy taking hold in the recent financials across the last 12 months. Internal domain sales for the last 4 quarters went from $0.857m, $1.266m, $1.003m and finally to $2.779m. The growth from a zero revenue base is quite impressive.
Much of this growth has been driven from the deal with Godaddy to adopt the Domain Directory Network (DDN) which was officially announced earlier this year. As the network expands into other registrars there is no reason why these numbers won't continue to rise. All good news for the sales of domains and increasing the average price per domain sold.
Another way to value DBS is to take their yearly internal PPC earnings and multiply it by an appropriate factor. Given how clean their portfolio is and the fact that trademarks fastidiously sought out and removed I wouldn't be surprised if they could achieve around 10 years multiple on their earnings. To be safe let's make it 8 years.
Last year financial year, DBS earned $AU6.184m from PPC revenue. Given an 8 year multiple this then equates to being able to sell the portfolio of PPC domains for $49.472m which is not a bad outcome. My guess is that the only reason why they aren't selling the portfolio at this multiple is because they are getting more for many of the domains from selling them via the DDN. In fact, in some cases they are achieving thousand plus times earnings on sales.
When you consider the fact that the company is trading at a P/E ratio of 7.6 and the industry sector is trading at 12.86 you just have to wonder what is going on and what a potential bargain DBS shares are currently trading at. Even at the market sector P/E ratio the share price should be trading at AU45.6 cents per share.
All I know is that dividends are being paid (albeit modest), the company is profitable, I have confidence in the management team and a strategy for both growth and diversification of revenue is in place. These check boxes all put a smile on my face.
Despite all of these calculations I still think that DBS is the cheapest way any domain owner can buy into a completely generic portfolio plus have a diversifed income stream. Better than that, you also have liquidity of your asset via the market.
As always, I would remind any readers that I own shares in DBS and that prior to purchasing any that I would recommend that you seek professional advice. The purpose of this article is to spark debate and thinking and does not constitute an endorsement of DBS.
Source: Posted on WhizzBangsBlog by Michael Gilmour -- Reprinted with permission -- September 22, 2008