sex.com - your final exam in valuation.

[bidawinner]

Originally posted by Tee
The lowest amount I've seen quoted in a number of articles for sex.com is "several million a month" which is appx 36 million a year- generated..

and you know those numbers were inflated...

I always take revenue and profits announcements with a grain of salt from companies that dont report audited reports to the SEC.

SEX.COM is no doubt a great name.. and it's a great name because the TYPE-INs allow it to operate with out a Marketing/advertisng expense that in it self could cost a million a year..so what means is the name msot likely can be operated PROFITABLY (because you can eliminate one large expense that all your competitors have to spend).

 

[bidawinner]

Originally posted by Tee
Here is an article, sorry if it was posted already:

http://www.wired.com/wired/archive/10.02/sex_pr.html

I was pretty damn close on conversion rate .. I said probaly around 1 out 100

http://dnforum.com/showthread.php?s=&threadid=16736&perpage=20&pagenumber=3

Your article http://www.wired.com/wired/archive/10.02/sex_pr.html claims


Levi pities anyone dreaming about breaking into porn these days. "When we started in late '95, our conversions were about 1 of 20. Now our average is 1 of 200," he says. "If you started now in this business with $5 million and didn't make a single mistake, I still don't know if you'd make it."

 

[bidawinner]

Well DomainAppraiser at least you started a popular thread !

Nothing personal.. you got a good discussion and debate out of it.. and your raking in the DNF points!

 

[Tee]

conversion depends on approach I think - you can always make it better by changing..

you'd need to know the typeins coming in as a start to determine value - seems like sex.com does use many affiliates so they are paying for traffic - I think you can pay for traffic profitably...

How much traffic would sex.com need monthy to earn 50 million a year profit?

 

[.biz]

During the stolen period (5-6 years), It was estimated that Cohen generates $43 millions in total, which is $7 - 8 millions a year.

I'd say the domain sex.com itself is worth $30 - $75 millions depending on the situation of both seller and buyer.

 

[NamePopper.com]

Originally posted by gregr
Don't waste $50 for a "professional" appraisal on your domain, post your domain name here and seek advice/valuations from other domain speculators.

Due to the above stated rule - and the fact that this thread has developed a life of it's own - I am moving it to the lounge. Please continue the discussion though - because it's certainly interesting - and good debates are healthy.

 

[options]

Good morning. I see the thread expanded a bit, good job.
Yes, I guess the court had at least close to the exact data when making its decision.
And yes, again, the only asset sex.com have is the type-ins.
Nothing else. On basis of that only you should make its valuation.
With regard to further improvements and investing into it, there
should be no difference if choosing any other name and applying
the business plan onto it.
The slight advantage could be only its IPO somewhat higher potential, but it doesn't make a huge difference.

 

[domainAddict]

Originally posted by DomainAppraiser
F

So did I win?? Yeeaaa!!!

 

[.com.net.org]

Gratz George, you've read DA mind.

 

[CoolHost.com]

"Due to the above stated rule - and the fact that this thread has developed a life of it's own - I am moving it to the lounge. Please continue the discussion though - because it's certainly interesting - and good debates are healthy."

AMEN! Thanks for listening, Namepopper!
Good Luck.

 

[domainAddict]

It makes you think: Why would anyone want to sell a domain thats making him $36-$100 MIO? In 1 year hecan earn enough for a whole life, and not a cheap one. In ten years, hes got that much money that he cant ever spend it even if he wanted - unless buying dozen stealth bombers and few hundred nukes. He can easily get 10MIO from the interests if he deposits only 1 year income into SAFE government bonds. After 10 years, interests would be getting him 100MIO a year, not including the regullar income from the site. So I see no reason to sell this name, even if offered $9999999999 billion. Why? He has enough money anyway, therefore by such sale he would only lose the prestige of owning this domain, no other monetary gains. The only reason for selling it that I can see is, a fear for your life if being threatend or lets say kindnapped. Theres no other reason I can think off why to sell it, therefore this DOMAIN is PRICELESS! And all this TALK is WORTHLESS, since you cant realy put a pricetag on such a domain.

Now, I dont care about your "grades", just say this isnt true if you can? I thought so..

 

[domainAddict]

NOTE: even if the income is "only" 5MIO a year, all that Ive posted above still stands..

 

[Sportacle]

What is sex.com worth? Let's use a valuation model used to value acquisitions (and exclude godwill, as that is purely debateable).

Lets estimate $50 million per year in cash flows (rev-costs+ depreciation= c.f., with no depreciation of the asset).

Now, many posters here have simply mutliplied the cash flow per year * some number of years that they guess the internet will last.

If we apply the going prinicple from GAAP, all companies are considered on-going entities and thus their lifespan is considered to be infinity. So, no need to debate how many years we think the internet will last, as valuation models used in finance for valuing equity assumes a "Terminal" value.

Now, we must assume some growth rate of cash flows. In other words, as the internet continues to grow and users continue to come online then cash flows should increase for the site. $50 million this year may become $51 million next year. Usually, we assume nominal GDP growth as the rate to assume over time (because this includes inflation). Inflation is important because of the old antage $1 today is worth more than $1 next year. Lets assume 5% (3% for real gdp + 2% for inflation).

Our model becomes: (50 million*(1+5%))/(Discount rate)


Here's the real question: if you had a chance to buy sex.com today with $x, or invest $x in some other business, what rate of return would you want on your money to buy sex.com? After all, you don't want to pay dollar for dollar of its worth because then you are just getting your money back. So, you can buy government bonds (on average) at 5% interest on that same money you would buy sex.com with, so let's say you want 20% return for your investment on sex.com. Or, this assumes that each year your investment earns you 20% interest (pretty high in these times).

The model is complete: (50 mil * (1+5%))/20% = $262.5 million.

So, if you bought sex.com for $262.5 million today, you should get a return on your money of 20% each year.

You can sub any numbers for: cash flows per year, growth rate of the internet, or the return on investment you expect. Personally, I would increase 20% to 40-50%. Thus making the domain worth only (50 mil *(1+5%))/40% = $131.5 million to me.

That is the value I calculated as if I was buyer about to make an offer to the sex.com owner. Now, some may argue that the value of the domain is worth all of the cash flows over infinity. Sure, but what is $50 million in 10 years worth today? In other words, would you just lend me $50 million with the promie that I'll give it back to you in 10 years? Simple answer, no. So, even for the current owner of sex.com, the estimated worht of his domain si not a simple multiplcation game of (money per year * years).

Final answer, using DCF model: $262.5 million, if I were going to make an offer and under the assumption that it makes $50 million a year in cash flows, and I want 20% return on my investment every year for eternity.

I am sure there are a ton of posters - including GeorgeK, who have used simple models like this, and this brings some practicality to the model.

Credit: Gordon Dividen Growth Model.

 

[options]

No way you can apply any traditional business (equity) valuation model on an domain name only.
It is true for all dotcom companies or those having internet as the key component in its business.
Once again, sex.com is not an enterprise with developed management, acumulated capital, unique product or service, etc,
where you can put all different factors and values into such a valuation.

Its only asset is type-in value or its POTENTIAL, thus intangible asset + earnings. I guess that's the very reason why is such companies extremly difficult to list on an exchange these days. They have nothing, those are empty shells generating money.
Their shares would be traded at sky premiums in relation to price/nta ratio and at the same time almost paradoxaly having unlimited liquidity.
How could you initialy value sex.com during an IPO process?
Dotcom crash proved that the RISK associated with such ventures
was extreme and that earnings must be highly discounted.

Here we have to deal mostly with the earnings as the only known (?) factor. If you insist on equity model, the only way I can think of is utilizing P/E ratio backwardly.
Forget those crazy P/E of 60-70 or 120, find en average .com today, multiply by discounted earnings (due to lack of assets)
and you'll have the probable value.

 

[Sportacle]

Anything can be valued if it has positive cash flows. The problem with the .com companies you talk about is that most of them did not have positive cash flows. Positive net income does not equal positive c/f and thus a P/E would be applicable if you had no c/f.

Not sure where your argument lies, as even if sex.com went to market a DCF would be built. I have had to do many for situations just like this.

Note that I purposely excluded Goodwill (the intangible part of the asset you speak of), as I knew it could raise arguments. That would not be part of a DCF, but obviously would be part of the final offer. You said that its only value is intangible asset + earnings. If I know the cash flows (I don't care about earnings) + goodwill. Thus, I have accounted for exactly wat you speak of.

I don't think you need to have a management structure, accumulated capital, or such to value an asset. The main concern is whether or not it generates positive c/f. If it does, then the value of any company is not on its balance sheet (as any asset has a liability) but in the future c/f's. Earnings are a useless indicator anways, as accounting procedures can create positive earnings. And net income and c/f are not equal.

Furthermore, the model I use accounts for risk by applying a high discount rate. You can choose whatever rate you want (as I state above). If you feel the venture is risky, then apply a 75% discount rate. I am not debating the numbers, I presented a valuation model and you can insert whatever number you feel like.

I can guarantee that if sex.com was an incorporated entity, with one director and went to market that a DCF would be built (if it indeed had positive cash flows). One such example is Communicate.com (OTB:CMNN) The only cash generating assets are a portfolio of about 30 domains. It trades at a P/E of anywhere around 1, thus the market has applied a high discount rate. And, any financier will tell you that whether you use a P/E multiple, P/S, P/CF, EV/EBITDA, or DCF model they should all equal each other, or be very close to coming up with the same value for the company.

P.S. GeorgeK is a PHd candidate in finance. I wouldn't mind if he snuck in his two cents here on the theory I apply. (I hopefully will be a Phd in finance candidate come this March - if all goes right).

 

[options]

Originally posted by Sportacle
(I hopefully will be a Phd in finance candidate come this March - if all goes right).

Good luck.

 

[Sportacle]

Originally posted by options


Good luck.

Much appreciated!

 

[GeorgeKGeorgeK is verified member.]

Sportacle's approach is sound. In all these basic models, the principles are very solid --- it's a matter of how you put in the inputs, though, as there are assumptions in each model. E.g. one of the Discounted Cash Flow model's inputs is the growth rate. That's usually not constant over time, either (there are models that allow for two growth rates, e.g. one in the short-run, "hypergrowth", and then a long-run growth rate which is lower).

Even assets with negative cash flows can be valued using various approaches. For example, suppose you have a gold mine, where the cost of production is $500/ounce. Yet, the current price of gold is only $400/ounce. Is the gold mine worthless? No -- you have an embedded option, in that the gold mine will payoff if gold rises. So, like a stock option, that "out of the money" option has value....and it has value the longer the term of the option.

e.g. a call option with an exercise price of $100, when the stock is currently at $50, is practically worthless if there's only 1 week until expiry of the option (unless the volatility is huge!). But, if that option is for 10 years, the option will have considerable value.

Similarly with domain values....in a way, you can look at some of them as "options"....they might pay off big one day, and the cost of keeping the option "alive" is the continued registration cost of $6 to $10/yr. If you believe domain values in the future are very volatile, that 'option' will have value.

 

[Sportacle]

Originally posted by GeorgeK
Sportacle's approach is sound. In all these basic models, the principles are very solid --- it's a matter of how you put in the inputs, though, as there are assumptions in each model. E.g. one of the Discounted Cash Flow model's inputs is the growth rate. That's usually not constant over time, either (there are models that allow for two growth rates, e.g. one in the short-run, "hypergrowth", and then a long-run growth rate which is lower).

Even assets with negative cash flows can be valued using various approaches. For example, suppose you have a gold mine, where the cost of production is $500/ounce. Yet, the current price of gold is only $400/ounce. Is the gold mine worthless? No -- you have an embedded option, in that the gold mine will payoff if gold rises. So, like a stock option, that "out of the money" option has value....and it has value the longer the term of the option.

e.g. a call option with an exercise price of $100, when the stock is currently at $50, is practically worthless if there's only 1 week until expiry of the option (unless the volatility is huge!). But, if that option is for 10 years, the option will have considerable value.

Similarly with domain values....in a way, you can look at some of them as "options"....they might pay off big one day, and the cost of keeping the option "alive" is the continued registration cost of $6 to $10/yr. If you believe domain values in the future are very volatile, that 'option' will have value.

Nicely put George. I wasn't sure if this thread was ready for Modigliani and Miller

 

[options]

The only thing I don't agree is using cash-flaw in valuation.
I know that is against "industry" standards, but that is mostly
valuable in analyzing CURRENT equity price, not tag price of business.
Cash flow in profitable company mostly depends on good or bad administration and as such is of secondary value.
You can have very profitable company and still negative cash flow.
Profit is that what matters in this case.