Question

Are there any currently popular Internet sites that you think may not be sustainable? Is there an imbalance in market valuations and profitability?

Answer 1

There are many internet based businesses that don't appear to have potential to remain sustainable in the long run.

One such example i can think of is Zillow Inc.

Zillow is an online real estate database company that allows user to search for a place to rent or buy. It allows home sellers, buyers and other real estate professionals to login on its platform and then brings them together. The company had reported losses year after year despite having a good valuation in the market place.

The reasons why i think think company is not sustainable are mentioned below:

1. Presence of many alternatives: The business has turned competitive and there are many more players in this space with nearly similar business model. Players like Redfin, Homesnap, Neighborhood Scout, Realtor.Gain have similar business models and are cutting into the pie.
2. Penetration of internet and smartphones: The success of such internet based business is driven by internet penetration and penetration of smartphone amongst the potential users of the house search websites. While such a penetration is not an issue in case of developed countries, the same remains questionable in developing countries and under developed nations. Hence, scalability of business model of internet based housing companies is a big question mark.
3. Home is an emotional investment. People have tendency to physically visit a property before making decisions. This preference of people is also difficult to change. Hence shifting the house hunt to a complete online platform is quite difficult.

Imbalances in valuation

• Such companies enjoy valuations despite remaining unprofitable for years. Their losses are continuously funded by external investors through a series of equity funding. So, the first imbalance in valuation is lack of proper justification behind valuation when the business itself is unprofitable.
• The second imbalance in valuation is the fact that in the absence of profitability, such companies are valued on parameters like traffic, active users, gross value of transactions etc. All such parameters are very dicey and it's unwise to link valuation to these parameters.
• The valuations are driven by expectation. We have seen that such companies have failed to achieve the kind of forecasts they made five years ago. So achievement of future forecasts is also a question mark.