The Internet has undoubtedly transformed the way business is done. Sure, money has been lost on Internet companies lacking sound business models, and there’s been a fair amount of skepticism about transactions being done in “thin air,” but over the years, online business has become an important asset to many industries.
It’s no longer a question of whether a company needs to have an online platform, but only of how to best integrate it. Businesses that understood early on the global reach of online sales have made great strides, and the rewards to come will spread as online business and sales applications continue to expand.
I distinctly remember the major brokerage firms’ initial reaction to online trading: It would be for the little guy and of no interest to big clients. Quickly, however, consumer demand and the fear of lost business forced the hands of financial firms. It became a matter of figuring out a way for clients to have the choice between speaking with a representative and letting them trade online for themselves.
It’s become the same for retailers: Invite them into your stores, but make sure they can “click and ship” if they prefer. Many businesses have seen profits explode and their customer base widen dramatically by offering online shopping. High prices at the gas pump will only fuel this trend.
Also a result of online capabilities, delivery services like UPS and FedEx have suddenly become global. This has had a profound effect on many industries and is helping to continue to spread the free market around the world. Dramatic cost savings are helping companies fill orders for products they were previously only buying locally.
By responding to international requests for proposals, business-to-business transactions are replacing the showroom salesperson and have knocked down geographic boundaries. The cost savings for buyers and expanded volume for sellers has been measured in the billions of dollars for many companies.
One of the more interesting developments that’s taken place is in the area of excess inventory in the travel industry. We’ve previously been exposed to the dramatic price swings for airplane tickets depending on how long in advance a flight is booked. Once the plane takes off, it’s another story: Each unsold seat on the plane drives the airlines crazy.
Understanding this love-hate relationship between the passengers and airlines, Priceline.com Inc. (NASDAQ: PCLN) created a great business model. Despite the poor reviews its initial advertisements received, Priceline had a solid idea and has since grown into a profitable cash cow. It figured out a way to benefit both the buyers and sellers in the transaction. A comparison of what Priceline was able to accomplish over less successful Internet businesses drives home the importance of what to look for in Internet-based companies.
A few years ago, investors and analysts developed new metrics to evaluate online businesses—we began to hear about “hits” and “clicks” as a measure of success. As we know now, these methods lost investors money while a focus on accelerating margins and cash flow continued to work. Cash flow can aid in making acquisitions, buying back shares, and expanding reach. This fact holds constant regardless of the type of business. Somehow people forgot that when investing in online companies, and they paid dearly for it.
The Internet is still in its commercial infancy. Over time, speed, and connectivity will be enhanced several times over. More applications will become available, and Web 2.0 will give way to newer ideas. Regardless of the new names or new ideas, remember that it still comes down to making money.
When investing in a stock, think about the most important question: Would I like to own the whole business? The answer can usually be found by looking at the cash flow, not counting eyeballs or page clicks. Don’t get lost in “new era” talk. Yes, online profits are available, but don’t forget: It’s still business.
About the Author
Jordan Kimmel is president and portfolio manager
of the Magnet Investment Group, a New
Jersey-based registered investment advisory. For
more information, a current copy of the fund’s
prospectus, or current performance data, call
(888) 766-6828.
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