How do these two internet stocks stack up?

Is Seek or Wotif the better business?

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The network effect is present where a service becomes more valuable as a result of attracting more users, and it often results in the company with the largest network dominating the market for as long as it maintains the network.

Perhaps the most successful Australian company that fits this description is jobs website Seek (ASX: SEK). However, nothing is guaranteed and network effects can unravel very quickly if the service is superceded.

Seek runs jobs websites, as well as selling internet-based educational services in conjunction with tertiary institutions. The company owns or partially owns websites in Africa, Southeast Asia, China, Brazil, Mexico, New Zealand and Australia. Its various brands are the key to its business, because although the actual platform could be replicated by a competitor, the brand awareness is what keeps job seekers visiting the various sites, and in turn this makes the websites more useful to employers.

Seek has grown by acquisition in recent years. The pattern is for Seek to buy a part of an emerging jobs website in an emerging market, and then increase its holding if and when there is an opportunity to do so. It has recently increased its holding of companies operating in China and Southeast Asia. As a result of fairly aggressive international expansion, Seek has about $300 million in debt.

As Seek has transitioned from an organically growing domestically focused company to an acquisitive company with websites around the world, the return on investment that the company achieves from capital expenditure has decreased. However, the company is still able to benefit from organic growth, as it has focussed its acquisitions in growing markets with lower levels of internet use than in Australia.

Whereas Seek has pursued international expansion rather aggressively, accommodation website Wotif (ASX: WTF) has taken a slightly different approach. Wotif has made some (not particularly successful) acquisitions. However, its focus is to expand the number of hotels available through its main website, and it is currently adding hotels from around the world to its Australian website.

It has also expanded its Wotif brand to include flight bookings and has developed, in house, a reasonably successful iPhone application that can be used to easily book a room on the go. However, mobile phones account for only 9% of bookings at this stage.

Wotif has recently begun increasing the commission it charges hotels, and this is a true test of whether the website has pricing power. The website is undoubtedly an important source of revenue for some hotels, but if it were to lose accommodation providers in sufficient numbers, we could witness the unravelling of the network effect.

If prices on the website start to noticeably exceed prices offered by the hotels on their private sites, Wotif could increasingly be used for selection, but not for booking, thereby cutting the company out of the transactions all together.

It has also been noted by some that Wotif has $150 million in cash, and very little debt (unlike Seek). While this is true, it misses an important point, because Wotif had about $170 million of payables on its balance sheet at December 2012. This is because Wotif takes cash from the website users, and then pays the hotel once it has provided the room. Wotif does not have a debt burden to worry about, but its balance sheet is not as strong as the cash figure would suggest.

Foolish takeaway

Seek and Wotif have superficially similar businesses, but the companies are following different strategies. Wotif is more focussed on maintaining the profitability of its core website and at $4.90 pays a dividend of about 5.1% fully franked.

In contrast, Seek is expanding into new services and new markets and has much stronger growth prospects as a result. At $9.25 it yields about 2%, also fully franked. Both companies deserve a spot on your watchlist.

Interested in our #1 dividend-paying stock? Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

More reading


 Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article. Find him on Twitter @claudedwalker.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »