When CERN released the World Wide Web in 1991, few thought it would amount to much. In fact, noted Author and Astronomer Clifford Stoll proclaimed in a Newsweek article that it was just a passing fad and would never catch on.
Many investors were not fortunate enough to ride the tech boom as high as we would have liked. I, for one, was only 24 when the bubble burst in 2000.
Fortunately, the space is about to go through a major change that could set off another boom for those able to get in front.
Dot-com is so 1990s
Starting March 23, the Internet Corporation for Assigned Names and Numbers (ICANN) willincrease the availibility of Web addresses by assigning some 1,900 domain suffixes, the part of a website address that ends in .com, .org or .net. The project has been five years in the making, but this year looks like the watershed moment for many of the companies that will benefit. An additional 1,900 domain suffixes represents an increase of 8,600% over the 22 currently in use.
And while the project may not bring tech the valuations seen in the 1990s, it could mean a surge inrevenue for some industries in the sector. Specifically, companies in Web registry, search and advertising stand to benefit.
Here are four stocks I believe could reap the most advantages.
Verisign, Inc. (NASDAQ:VRSN), which currently manages the .com and .net domains, may see some increased competition, as other operators grab new domains and users flock to them. Still, the company just signed a six-year contract with the U.S. Department of Commerce to run the main database of domains, which basically amounts to six years of guaranteed revenue.
Company management expects between 900,000 and 1.3 million net additional addresses were added in the fourth quarter of last year. Dot-com registrations have grown from about 20 million in 2001 to 105.9 million in November 2012, according to Verisign. That is an annualized growth rate of 16.4% with little slowdown in sight and with a government contract on the fees.
Google Inc (NASDAQ:GOOG) is sure to see an increase in search as Internet users wade through the new maze of Web addresses. The $239-billion behemoth should also see increased advertising as companies pay to highlight their new addresses. The increase in search, not only from the new websites, but also from the transformational change in mobility, could benefit Google more than any other company.
The company has been able to sustain an 18% compound growth rate in revenue during the past five years, even while making a jump into new niches such as tablets and smartphones. The stock is trading for just 16.7 times forward earnings, which is extremely low, given its expected 13% earnings growth and an operating margin of 27% that’s above 95% of peers in the industry.
Marchex, Inc. (NASDAQ:MCHX) and ValueClick Inc (NASDAQ:VCLK) stand to ride the wave of higher online marketing spending as well. Both companies operate in various fields of Internet advertising and marketing for small businesses.
Marchex provides services and technologies that help advertisers reach local consumers online, offline and through mobile devices. The company’s primary services include digital call-based advertising, pay-per-click advertising and website traffic sources. ValueClick offers digital marketing services and technology infrastructure tools to help companies manage their online advertising across multiplechannels.
Both companies are currently targets for short-sellers, making the potential for a quick gain very plausible. Insiders own 17% of Marchex and 5% of ValueClick, with institutional ownership of ValueClick a surprisingly high 90% of shares. Short interest in both stocks is above 10%, so any positive news, which I think could soon happen, would send the naysayers running for the exit. In fact, there are currently more than two million Marchex shares shorted, with an average volume of just 73,800 shares traded per day. There is nowhere near enough liquidity in these shares to unwind that kind of a position without pushing the price skyward very quickly.
Risks to Consider: The process of rolling out 1,900 new domain names will not happen overnight. Investors may want to position for a quick pop in sentiment for stocks in the space, then take some profits as revenue catches up with valuation.
Action to Take –> The expansion of domain names could change the way we surf the Internet. Investors who missed the first great tech boom should position their portfolio early for the changes coming this year. Look to companies that will benefit from increased search and advertising of the new Web environment.
This article was originally written by Joseph Hogue, and posted on StreetAuthority.