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DOMAIN INVESTING AND STOCK MARKET
From the Sedo newsletter, by Tim Schumacher, Mara Miller, and Edie Abigail Dover at Sedo.com
There are many similarities between investing in domain names and investing in the stock market. With stocks, you earn dividends and with domain names, you can earn parking revenue from natural traffic. With a multitude of investment opportunities to choose from, speculating on domain names is a fairly recent occurrence. The concepts and theories behind domain investing, though, are the same as those of more traditional ventures.
It is important for any serious domain investor to understand the significant relationship between investing in stocks and investing in domains. Stocks provide dividends and the potential for capital growth. Similarly, domains provide revenue and growth potential. Domainers can earn revenue from domains through parking (similar to a stock?s dividends) and sell them for profit (similar to the way capital growth is expressed in the stock market). While the longevity and popularity of the stock market has provided the opportunity for a plethora of research and analysis, the relatively new domain investment market may need many years until it catches up in terms of research.
First, let us look at what drives valuation of both stocks and domains. The main factors determining the value of a domain name are:
(Future) resale value: Domains with the greatest resale value are those that are catchy, short, and have good advertising and branding potential. They should also have a common top level domain (TLD) such as .COM. If a domain has all those characteristics, there?s a high likelihood that someone will buy a name at a premium in the future. However, the emphasis is really that this is future growth potential!
(Current) Traffic: The quantity and quality of traffic influences the value of a domain. The more valuable traffic a domain has, the more revenue it can generate right now, as a domain’s natural traffic can be monetized through parking programs such as SedoPro. Domains are often sold in multiples of the domain’s annual revenue.
If you look at the stock market, two major forces also drive the valuation of a stock:
(Future) growth: A company which will be able to grow fast (and make profits in the future) is valued higher than a low-growth company.
(Current) profits/EPS: A company which is more profitable is valued higher than a low-profit-company.
Mapping those two value drivers into quadrants, we can see four major classifications in equity investments as well as to four major classifications in domain names.
Dividend Stocks (e.g. Tobacco) - Stocks that have high profits, but low growth potential. These are similar to Typo Domains (e.g. realestaet.com [sic]) because, while often profitable, typo domains are not the most sought after for branding and the growth is limited.
Takeover Targets (e.g. Chrysler) - Stocks that have both low growth and profits. In the domain world, these are called Junk Domains (e.g. myjunkdomain.net). Junk domains earn lower parking revenue and do not have much value in an aftermarket.
Stars (e.g. Google) - Stocks with both high growth rates and earnings. High Traffic Generic Domains (e.g. games.com) are most closely associated with this kind of stock. These domains earn the most revenue in parking and have the highest resale value overall.
Growth Stocks (e.g. Biotech)– Stocks in rapidly expanding companies with little profit. These companies have a low price per earnings ratio (P/E). Brand Name Domains (e.g. vodka.com) are most similar to growth stocks. Initially, they don?t have any profits, but future branding and resale value is high.
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