As we wrap up Break Down August -- it's still August, by the way, don't believe what The Man is telling you about September -- let's next take a look at our last Rule Breaker candidate, identified as a potential Breaker on the list from our 2000 Rule Breaker Seminar and run through the criteria most recently by scrim1.
So just what exactly IS InfoSpace?
Easy: "A leading global Internet information infrastructure services company." The sort of phrase one can really wrap one's brain around, no? "Honey, InfoSpace is just an Internet information infrastructure services company, that's all!" you explain. Gee whiz, it couldn't be more obvious. Yes, we're probably all looking for a little bit more Internet information infrastructure services in our lives. Our question today is: In our portfolios, too? It's time for our Rule Breaker "Break Down" of InfoSpace.
Brief consideration of price-to-sales ratios for Rule Breakers
First, some quick numbers. InfoSpace (Nasdaq: INSP), for the trailing 12 months, has posted the following:
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Sales: $69 million
Earnings: deficit
Today's market cap: ~$10 billion
Lacking net profits, the Rule Breaker investor must instead look for a multiple of sales. Using the numbers provided above, we discover...
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Price-to-sales ratio: 146
There is no "right number" for this ratio. What a number like 146 can tell you, though, is that InfoSpace is very richly priced compared to many other companies. Here's the present price-to-sales ratios for a selection of other companies:
Ford 0.3 Coca-Cola 7 Amazon.com 7 Yahoo 74 Celera Genomics 138A dependable rule is that small companies with hot growth prospects will, in general, command higher price-to-sales ratios than large ones because their growth rates are much higher. Investors pay up for dynamic growth.
Another reason that InfoSpace is priced like a top dog? Its gross margins. When you take cost of sales out of sales, you arrive at gross profit. When you take gross profit as a portion of sales, you have gross margins. The Rule Makers of the world generally score higher than 50%, meaning they're running light businesses that have the capacity to generate substantial profits. InfoSpace, merely a potential Rule Breaker at this green stage of its growth -- and not yet sustainably profitable -- is sporting gross margins in its most recent quarter of 81.8%.
When you combine the speed of sales growth together with an early stage company's gross margins, you have as good a read on the level of a company's price-to-sales ratio as any two factors will provide. A read on a company's price-to-sales ratio is therefore a read on its stock price.
Margins like InfoSpace's -- gross margins upwards of 80% -- will obtain share prices many multiples of what the company's trailing 12 months of business would seem to justify. That's the reason for such a high market cap. InfoSpace is priced like a top dog, and we should therefore analyze it as such.
Top dog of what?
InfoSpace's mission, as best I could gather from its website, is:
"To allow our partners to offer their customers the ability to conduct commerce, access information, communicate and otherwise manage their lives at any time from any device."A powerful concept, and the words mean as much as they say. We're talking broad, here, dear Fools. "InfoSpace in every space" is the service mark tagline.
Put this all together and you find that InfoSpace is attempting to operate across the entire spectrum of digital interaction. If you are an offline business hoping to establish an online site where you can hock your wares, InfoSpace can help you. If you are a Bell company hoping to get up a "Yahoo-like portal" for your new Internet phone customers, you hire InfoSpace (virtually all U.S. phone companies, except Sprint, have done so in this regard -- SBC was the most recent, just a couple weeks ago). In fact, InfoSpace actually combines these two aforementioned examples as an integrated part of its business model: it has all the regional Bells marketing its Web services to their local merchants. If you didn't grasp the full beauty of that line, read it again.
As this posting from mmick earlier this year states, wireless services are where InfoSpace hopes most to profit. The company's CEO, Naveen Jain, was quoted as saying, "The killer applications for wireless devices are going to be unified communication and secure commerce. Our communication services enable users to not only send and receive messages on their cellular phones, but also from any device to any device including PDAs, pagers, and PCs. Our commerce services not only allow mobile users to check stock quotes, but also trade stocks; not only find the cheapest price for a product, but also make single-click instant purchases from any website; and not only check credit card statements, but also make a payment. This is more than just a dream, these are the services we offer today."
It is this "space," which begins with information and ends with taking action, that InfoSpace hopes to call its own. InfoSpace aims to dominate as a private-label provider of the total online commerce package -- the information, services, and transaction capability brought to you by the New Economy.
The dream InfoSpace interaction (from the company's standpoint) is you sitting on a subway train deciding to purchase five new laser printers for your small office, using your handheld device to look up info on what will suit your needs, locating the best deals available via a local merchant who can deliver within 24 hours, and then you swiping the stylus or punching a button to execute that very transaction. All while you sit on the subway. InfoSpace is profiting from virtually every portion of that entire interaction, except the subway ticket.
Tomorrow in the final part of our Break Down we will continue to evaluate InfoSpace as the top dog and first-mover of the "everywhere-to-everywhere digital activity" industry. Is InfoSpace a Rule Breaker? We'll give our opinion tomorrow. Until then, let us know what you think on the InfoSpace and Rule Breaker Companies discussion boards.
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