Categorized | Domaining Tips

Domain Valuations Based on Revenue from Type-In Traffic – Are You Kidding Me?

Posted on 24 November 2010 by Andrei

It always amused me when I saw people who commented on forums about how they were “professional investors” because they bought non-typo domains strictly based on revenue from type-in traffic. I pictured them sitting on a chair in front of a desk and staring at a bunch of revenue statistics CONVINCED that what they were doing made perfect sense… but it was just a case of grown men playing pretend!

Revenue from Type-In Traffic – No Long-Term Predictability Whatsoever

Just take a random domain (again, I’m referring to non-typo domains only) from your portfolio that you’ve owned since let’s say 2007, any domain, and analyze how it did revenue-wise back then.

Let’s assume the domain in question averaged $100 per month back in 2007… how much is it generating now?

$100 per month like in 2007? Yeah right!
$90 per month? You wish!
$80 per month? Nope!
$70 per month? Wrong again!

I’m sure you understand the point I’m trying to make: revenue from type-in traffic is anything but predictable. Just look at how much things have changed since 2007!

That being stated, let’s assume that you bought domains strictly based on revenue back in 2007 and that you bought them at 20x yearly revenue.

How would things stand now, when you’re not even making 50% of the monthly revenue you were counting on three years ago? Instead of expecting to make your money back in 20 years, you end up realizing that it would take 40+ years for you to break even… that is, if your earnings won’t continue to decrease like they have done so far!

Anything But Revenue-Based Valuations… Anything!

Can you analyze an investment in a domain based on the future of the market it’s catering to? Sure, why not!

Can you analyze an investment in a domain based on let’s say scarcity? Sure, why not!

The list could go on and on and if you were to extract just a drop of knowledge from this post, do yourself a favor and remember this: anything, and I mean ANYTHING, but revenue-based valuations!

10 Comments For This Post

  1. Rich Says:

    I would tend to agree that revenue is probably just one metric that one might use. For example, in real estate, a lot on Park Avenue in NYC may not be producing any revenue but the location is pretty good and should command a very handsome premium (of course no such lot exists at this time. 🙂 ).

    On the other side, a store on Park Avenue may be doing a great business selling Obama for President in 2012, but that revenue is very problematic and probably short lived.

    So, no one metric will do. A complete analysis is necessary.

    Thanks for the post. It was very helpful.

  2. Snoopy Says:

    “Can you analyze an investment in a domain based on the future of the market it’s catering to? Sure, why not!
    Can you analyze an investment in a domain based on let’s say scarcity? Sure, why not!”

    //////////////

    Factors like these don’t mean much, how do you price a name based on “scarcity” or on a “future market”. That sounds like guesswork, not something scientific. Justifying a purchase based on something else doesn’t make it immune from falls.

    Take a look at say LLL.com or LLLL.com, areas of the market typically priced based where they are based on rarity/speculation/whatever one might call it/, those names have fallen through the floor in value just as much as type in revenue has.

    So what is the better position to be in, holding an LLL.com that has fallen 60% in value or holding onto a traffic name whose value and revenue has fallen 60%?

    Or how about the somewhat weak keyword domain that might have been worth $50 in 2007 and is now worth under reg fee? The fact that its revenue has stayed the same – from $0 to $0, doesn’t mean it has been a good asset to hold.

    Now some might be happy holding as asset that produces to no revenue when everyone else has lost 60% of theirs that is fooling ones self.

    I think if we take anything from the post it is that PPC revenue has fallen hugely. But that doesn’t mean it is a bad idea to value something based on revenue.

  3. Uzoma Says:

    I share the author’s position. The problem with domain business, which affects its valuation, is that too many crooks populate the chain; there is a monopolist in there; there’s no transparency. Therefore, the goal post will keep moving. Imagine for a moment that advertisers are charged $xxx for ads, and $x paid to the domain owner consistently, everybody will be a winner. The parkers, google, registrars, domain owner, advertiser, everyone! But no!

    On the second point you make, if type in traffic doesn’t amount to a hell of much, which I don’t think it does, it is a bargain for someone to buy my websiteforsex.com for $xxxxx over paying $13000000 for sex.com 🙂

  4. Andrei Says:

    @Snoopy: we all love to be in control or at least to think that we are in control and that’s exactly why a lot of domainers think (or thought) that revenue-based valuations are a more “scientific” approach than let’s say valuing domains based on “fundamentals” such as the expected development of the industry in question on the Internet and so on.

    While I personally encourage the valuation of WEBSITES based on their revenue, domain revenue from type-in traffic is not relevant enough to be worth it.

    Why? Because a 20-year revenue-based valuation of an asset as a part of an asset class which didn’t even exist 20 years ago does not make sense. There are FAR too many fluctuations and as initially mentioned:

    “Revenue from Type-In Traffic – No Long-Term Predictability Whatsoever”

    1) How much direct navigation traffic was a random non-typo domain from your portfolio receiving in 1997? Compare that figure to the traffic numbers with those from a few years later and you’ll notice that the discrepancies are huge.

    2) How much revenue was a random non-typo domain from your portfolio receiving back in 2007? Compare that to its current revenue and, once again, the discrepancies are huge.

    My point wasn’t that revenue has fallen (it obviously has but again, that wasn’t my point), it’s that type-in traffic/revenue is not predictable enough to be taken into consideration as the main part of a 10/15/20-year valuation.

    Does this mean that other metrics such as the industry’s current status on the Internet corroborated with its expected online development are perfect? No, but at least the principles have not changed (the fundamentals of the industry the domain is related to, its online viability and so on).

    My conclusion isn’t that the two metrics I gave as examples are perfect, what I’m trying to make clear is that we as domainers need to understand that our investments are HIGHLY speculative and that no matter how hard we try to fool ourselves that type-in traffic and/or revenue have long-term predictability, the truth is bound to eventually smack us in the face 🙂

  5. Snoopy Says:

    “Why? Because a 20-year revenue-based valuation of an asset as a part of an asset class which didn’t even exist 20 years ago does not make sense. There are FAR too many fluctuations and as initially mentioned:”

    ////////

    That is too high as well in my view for a revenue stream that is currently declining. But thinking the multiples are too high is quite different to throwing out the model in my view.

    What would you say if multiples were 2 years?

    I think multiples are too high to justify buying most names on the basis of PPC revenue, not that the model of valuing that way is wrong. Personally I wouldn’t buy much in the current market, PPC revenue or not because in my view the industry is currently in decline. Still I haven’t seen anyone suggesting people pay 20X since 2007 either.

    ” No, but at least the principles have not changed”

    ////////////

    I think the principles have changed totally. People simply won’t pay the same kind of price as in the past for the vast majority of domains, type in traffic or not. The enduser market is still strong, but the domainer market in 2006-2007 went way above what could be justified in terms of enduser interest in domain and the reality of the market (sharp decline) was the opposite of what most expected (fast growth), hence most domains are worth significantly less today.

    “My point wasn’t that revenue has fallen (it obviously has but again, that wasn’t my point), it’s that type-in traffic/revenue is not predictable enough to be taken into consideration as the main part of a 10/15/20-year valuation.”

    /////////

    It is not different to say a lot of stocks where profitability levels can change fairly dramatically over time. Companies can go bust and industries can go into severe recession. People will continue to value that way though despite fluctuations because revenue is really the only thing that pays the bills. Take the airline industry or the banking industry, it is profit that counts even if it is up and down like a yo-yo or even if half the participants go out of business.

    ” understand that our investments are HIGHLY speculative”

    //////////////

    Agree, but trying to value something based on considerations other than financial ones (revenue & profit) is far more risky than valuing it on something tangible such as revenue (if if future revenue is hard to predict). Personally I would very rarely buy a name based on “potential”, that is for gambling money only. I would call 20X gambling as well because the multiple is too high.

  6. Snoopy Says:

    “Therefore, the goal post will keep moving. Imagine for a moment that advertisers are charged $xxx for ads, and $x paid to the domain owner consistently, everybody will be a winner. The parkers, google, registrars, domain owner, advertiser, everyone! But no!”

    ///////////////

    In my view the parker gets the lions share of revenue (unless they are really small in which case it is likely more like 30% or so). Personally I think the concept of people getting a lower share to try and explain revenue declines is a bit of a theory more than anything.

    Personally I think that in the past the domain area has probably been overcompensated for traffic and advertisers couldn’t easily filter it out if they wanted to, whilst smart pricing, a focus on quality and probably advertisers getting more focused on profits has now come into play and changed that. The domain industry isn’t full of high quality traffic, 50%+ is very low quality. It isn’t all diamondrings.com, a lot of its is spongebobsquorepants.com

  7. Uzoma Says:

    Snoopy,

    The problem I believe, is with the parkers. They probably ripped off both the adsource (by inflating traffic), and the domainer (by not being transparent, not reporting everything in the pot, and many other ways, like negotiating a poor deal to begin with).

    Having said that, no traffic is more important than the other. Eye ball should be eye ball. For example, how absurd will it be for advertisers on a Super Bowl Sunday to pay for “quality” eye ball? They pay for the ad period. That is the way it should be. If I were the ones doing the negotiating with Google or Yahoo, I will slam the phone on their ears so hard if they mention pay per click, they will never do it again. A domainer should be paid to place ads on their domain period. Pay or get lost.

  8. Andrei Says:

    @snoopy: “That is too high as well in my view for a revenue stream that is currently declining. But thinking the multiples are too high is quite different to throwing out the model in my view.

    What would you say if multiples were 2 years?”

    I’m glad you mentioned 2 years because 2x yearly rev is considered a great price for a WEBSITE based on my experience. On the website reseller market, it’s usually 6x – 8x monthly rev for websites which are easy to duplicate (minisites, for example) and more for websites which are not as easy to duplicate.

    This brings us right back to one of my previous statements:

    “While I personally encourage the valuation of WEBSITES based on their revenue, domain revenue from type-in traffic is not relevant enough to be worth it.”

    Why do I encourage valuations based on revenue for websites but not for domains? Simply because when it comes to websites, the multiples are FAR more realistic:

    1) if your website relies on just one traffic source, you shouldn’t expect more than 6x – 8x monthly rev on the reseller market unless you have another edge (a complex script or a great domain, for example) because your business model is “shaky”

    2) if your website relies on multiple traffic sources, you’re in a better position to ask for 10x – 12x monthly rev or, why not, even more

    When it comes to domains, however, valuations based on revenue have absolutely nothing to do with reality. Why? Because the yearly multiples which WOULD make sense for a buyer are so low that domain owners wouldn’t even think about selling based on them.

    In my opinion, revenue-based valuations for non-typo domains are not relevant because:

    1) long-term type-in traffic predictability for non-typo domains is just a dream

    2) the gap between what savvy buyers would want to pay in terms of multiples and what sellers expect is so “impressive” that a consensus will never be reached… never EVER 🙂

  9. Jason Says:

    Hand register good domains. I find many buys, even a dozen that made back cost of registration in the first few months. .info are good to make revenue. I made 5-10x the cost of reg on those domains.

    I’m a small time domainer compared to most, but Im confident on buying. People pay too much on future expectations.

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