While Australia is undoubtedly most famous for its mining behemoths BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), as a country we have produced some highly successful internet marketplaces. They are SEEK Limited (ASX: SEK), a jobs marketplace, REA Group Limited (ASX: REA), a real estate marketplace and Carsales.com Limited (ASX: ASX), a vehicle marketplace. All three are expanding internationally and they have absolutely thumped BHP and RIO over the last five years. Conventional wisdom may say to buy the mining blue-chips, but those two have significantly underperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) in the last five years (and the outperformance over 10 years is even more extreme). Welcome to the 21st century!
Compare the growing internet stocks with the “blue-chip” mining stocks:
Why are the internet businesses better?
Put simply, BHP and RIO have high ongoing costs, and high capital expenditure requirements to develop new mines. They are dependent on commodity prices for their profits, and sensitive to ongoing costs such as fuel prices. In comparison, the internet marketplaces have relatively low ongoing costs, and benefit from the network effect. This arises because they have the most buyers and the most sellers – making their marketplaces the most attractive to both buyers and sellers. This virtuous cycle is hard to beat, and gives the internet companies pricing power with an inexpensive but effective moat.
So is it too late to buy?
Well, REA Group is already up about 830% in the last five years and at a share price of close to $44.35, the market is basically saying that REA Group’s long-term prospects are more impressive than those of Google. REA Group is now firmly a blue chip company and its prospects for outperformance are low. REA Group is a hold at best.
Seek Limited has been the most effective of the three in terms of its overseas expansion. In particular, it is the major shareholder in the number two jobs website in China, Zhaopin, which it plans to float in an IPO. This should give it an opportunity to unload shares at a great price if the market becomes overenthusiastic, or even raise capital on favourable terms if it wishes. Seek is a hold.
Carsales.com is the the most attractively priced of the three and has only really begun its international expansion quite recently. It is gaining exposure to South Korea through an investment in skencarsales.com. It has exposure to South East Asia via an investment in iCar Asia Ltd (ASX: ICQ). With its Australian website carsales.com.au providing strong sustainable cashflows and a dividend yield of 2.8%, it is reasonably priced for its prospects. Carsales is probably a buy, if you want an established company with excellent growth prospects. I would be surprised if it does not thump the miners over the next five years as well.