IBG in 2005

The Internet Strikes Back

By Ed Bowsher (TMFArkle)
12/22/2005

Many private investors lost their shirts punting internet stocks back in 2000. Fast forward five years and some decent companies are paying significant sums to buy internet businesses.

ITV(LSE: ITV), for example, has paid £120m for the Friends Reunited website. Friends Reunited is expected to generate sales of £18.7m next year, so ITV is paying a hefty multiple! And ITV is not alone. GUS(LSE: GUS) recently paid a full sum for Pricegrabber.com, a US price comparison site.

So perhaps it's time for private investors to look at internet shares again. The problem is that none of the internet giants like Google(Nasdaq: GOOG) and Amazon.com(Nasdaq: AMZN) are listed in London.

If you want to buy a London-listed internet share, you have to look at some much smaller players. One of them is known to many Fools. That's website operator, Advfn(LSE: AFN). Its core business is a financial website aimed at private investors.

The heart of the site is quotes and data. If you want to know what trades have taken place today in a particular share, or what prices are being offered by different market makers, then Advfn's subscription services can tell you.

The company has also set up a joint venture in Japan, and owns a dating site called CupidBay.com.

You could argue that Advfn's valuation is rather rich at £17m when sales last year were only £3.3m. And Advfn only made a profit thanks to an exceptional gain on the sale of a business.

On the other hand, I'm pretty sure that the number of private investors in the UK will rise in the years ahead, so Advfn is positioned in an attractive space. And it could be a tempting strategic purchase for a larger player. Worth watching.

ASOS(LSE: ASC) is another well-known internet business. It sells fashionable clothes online and recent growth has been phenomenal. However, the company's shares are suspended after its warehouse was damaged by the Buncefield oil depot fire. Asos says it's fully insured for all losses.

Before suspension, the shares had slipped a little to 77.5p after slightly disappointing first-half results. That said, sales still rose 78% to £8.3m during the period, and there should be more growth to come once the warehouse problems are sorted out. If the shares come back at a level significantly below 77p, I'll be interested.

Internet Business Group(LSE: IBG) is another online retail player. It sells specialist sports equipment and unbranded MP3 players.

In a trading statement today, IBG said that its e-commerce division had achieved "record sales" in the run-up to Christmas. What's more, its internet advertising business, AffiliateFuture is also doing well.

AffiliateFuture enables website operators to sell advertising on a performance-related basis. So instead of just selling a banner for a fixed sum, the website's revenue reflects how many clicks and sales are generated by a particular ad.

The advertising division now accounts for 70% of IBG's revenue and that figure should rise next year.

On the downside, a similar advertising business, Deal Group Media(LSE: DGM) has issued two profit warnings in recent months. However, today's trading statement confirms that IBG is performing much more strongly.

Analysts expect earnings of 1.24p a share in 2006, so the shares aren't exactly cheap at 22.75p. But IBG appears to be a fast-growing quality business, and looks attractive.