U.S stocks are little changed on Tuesday morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) up 0.05% and 0.01%, respectively, at 10:15 a.m. EDT. Roll the Federal Reserve, the summer doldrums, and the World Cup together and you have an excellent explanation for the lack of volatility (though there are certainly reasons why the markets could be volatile: Iraq, Ukraine, the Fed's rollback of quantitative easing, etc.).
I wasn't particularly excited when GoDaddy earlier this month filed its registration document to go public. With Google (NASDAQ:GOOG) (NASDAQ:GOOGL) announcing yesterday in a blog post that it is beta testing domain registration service Google Domains, I'm even more underwhelmed. Google's move is equivalent to taking a model out at the knees just as she's about to step onto the catwalk.
It remains to be seen what sort of reception investors will give GoDaddy, but the company's precarious competitive position shouldn't be a surprise to anyone who has perused the offering document for the shares (doing so is a bit old-fashioned, but I'm fond of so-called "research"). In the "Risk Factors" section, GoDaddy spelled things out quite clearly, beginning on page 23 [bold text in the original document, italics are mine for emphasis]:
We face significant competition for our products in the domain name registration and web-hosting markets and other markets in which we compete, which we expect will continue to intensify, and we may not be able to maintain or improve our competitive position or market share.
We expect competition to increase in the future from competitors in the domain and hosting and presence markets, such as Endurance, United Internet, Web.com and Rightside, as well as competition from companies such as Amazon, Google and Microsoft, all of which are providers of web-hosting and other cloud-based services and have recently entered the domain name registration business as upstream registries, and eBay and Facebook, both of which offer robust Internet marketing platforms. Some of our current and potential competitors have greater resources, more brand recognition and consumer awareness, more diversified product offerings, greater international scope and larger customer bases than we do, and we may therefore not be able to effectively compete with them. If these competitors and potential competitors decide to devote greater resources to the development, promotion and sale of products in the markets in which we compete, or if the products offered by these companies are more attractive to or better meet the evolving needs of our customers, our market share, growth prospects and operating results may be adversely affected.
Investors tend to think of the "Risk Factors" section as boilerplate, but skipping over it is a mistake. The discussion of these factors is entirely relevant to the company's specific situation. In GoDaddy's case, the crux of the problem is that it lacks any competitive advantage (or "moat") whatsoever.
Google, on the other hand, does have a competitive advantage (so much so that in 2009 it prompted Warren Buffett's right-hand man, Charlie Munger, to remark: "Google has a huge new moat. In fact I've probably never seen such a wide moat" -- to which Berkshire Hathaway's CEO responded: "I don't know how to take [the moat] away from them"). Furthermore, in this instance, many of Google's services are complementary with domain registration and website hosting, including analytics and, naturally, Google's powerful advertising network. This is one race GoDaddy looks unlikely to win.
If you're interested in investing in newly public companies, I can steer you toward one that has a genuine competitive advantage: financial data provider Markit (NYSE:INFO), which began trading last Thursday. If you'd like to know why I call Markit a "Buffett-like company," allow me to refer you to my column.