I’m not a “doomsday” kind of guy and I don’t like to talk about macroeconomics I see in my day job. I truly love talking about buying and operating websites. But sometimes I see a disconnect from what I hear from professional investors and what I hear in the website investing world. Here’s my observation.
The unbridled economic enthusiasm post-financial crisis is gone. It’s dead. In fact, a bit of panic is already breaking out in the stock market.
But my real issue is this really impacts website investing even more than traditional asset classes and nobody is talking about it.
Buckle your seat belts.
Why This is Important
Websites trade on a multiple of historical monthly profits- generally in a range of 25-40 times. Most buyers, encouraged by the website brokers, assume that past performance is predictive of future results. In more professionalized asset classes, this is actually contrary to securities laws. You also hear the phrase “payback period” way too much in website investing. This whole dialogue is akin to driving forward while looking into the rear-view mirror.
I’m not about to pay for future profits that won’t materialize due to a change in the economy. Neither should you.
That’s the reason website investors also need to watch the bigger economic trends. Miss the signal that the economic outlook is dimmer and you will lose a lot of money investing—no matter what asset class. And that signal is usually the stock market.
“The Stock Market has predicted 9 out of the last 5 recessions.”
~Wall Street adage
Recent stock market performance is scary. At this writing, major US equity market indices are all firmly negative for 2018, wiping out substantial mid-year gains. Institutional investor sentiment has been rocked since the beginning of October. Back then everyone believed we would comfortably end the year with double-digit gains in the S&P and NASDAQ. That’s not happening. In fact, investors have lost money in both stocks and bonds this year. Ouch!
We all know the S&P 500 put in a bottom in early March 2009. It’s been 9 ½ pretty wonderful years. The Fed pumped money into the economy and the consumers responded with enthusiasm. Both the economy and all investors have done quite well since then.
However, now many people are looking for an even bigger pullback or even a downright bear market.
But remember, Bull Markets don’t die of old age. They usually end because of some excess that becomes obvious after the fact, like housing prices or excessive consumer credit in 2007 and 2008. Somehow the market knows.
So, the best bet is to look at the fundamentals (in the rear-view mirror) for any potential signs of danger, while respecting that the stock market is a leading indicator.
Let’s recap some of the more notable non-stock market events from the beginning of October until now:
- Sweden and Switzerland announced slight negative 3Q GNP declines in late November (worrying)
- IMF Chairwoman Christine Lagarde warned at the recent G20 meeting that economic growth prospects face “significant risks” (more worry)
- The US Treasury yield curve flattened to 10 basis points between 2-year and 10-year maturities, threatening to go inverted (very worrying)
- Fed Chairman Jay Powell affirmed that Fed policy will be more moderate and the market now prices only 1 rate hike—down from 3 this summer-for 2019 (not good at all)
- China’s growth has slowed and still no trade deal is close (serious double worry).
So, my conclusion is that the next 25-40 months won’t be nearly as friendly an economic environment as the past few years. You can’t even bet confidently there is no recession in the forecast (although some will).
But it looks obvious lower global economic growth is coming to the US in 2019.
Optimists will say It’s possible that the only global growth engine on the planet—the US economy—can lift the rest of the world out of economic doldrums. But this is a big ask for the US consumer. I don’t personally believe the US consumer can do this.
The other big risk is that we have transitioned to an environment where the fate of the economy is being fine-tuned by the Fed. “Goldilocks” is where the Fed attempts to keep the economy from both faltering or over-heating, keeping GNP growth, “just right”. While I respect the Fed immensely, this is tricky stuff too.
Finally, let me just add that Wall Street economists and strategists are about to release their 2019 predictions. And there is always someone trying to make a name by forecasting Armageddon. These folks will get a lot of play on CNBC, which won’t help sentiment in January. So be prepared for that.
What we obviously won’t hear are any comments from Wall Street experts on how various website monetization models will perform. But when consumers pull back on their wallets everyone suffers, from FBA importers to high-ticket drop shippers.
People will click on ads and “Save to Cart”, never to return.
Google will win for a while keeping ad costs high. But savvy entrepreneurs will just lower budgets until Google lowers CPC. That will happen when traditional retailers finally get the joke and pull back too.
“What’s nice about investing is you don’t have to swing at pitches…You can wait for the pitch you want.”
How Does this Affect You?
What happens when the future doesn’t look as rosy as the past? This is where it gets very interesting for investors with some dry powder to invest.
Website multiples on past earnings will definitely trend lower to reflect economic uncertainty. At the same time, websites will likely start to produce lower monthly earnings. With this double-whammy, website sellers will either lower prices, give better terms, or be left at the altar.
I think the stock market is doing just this–adjusting from higher growth expectations to more moderate ones— and website valuations will too.
In this kind of environment, cash buyers can sit back and confidently do nothing except hoard cash. In fact, you don’t even have to accurately call the bottom.
If both trailing earnings and monthly earnings multiples decline by 10%, valuations will decline by 19%. Double those numbers to 20% for each—not unlikely in my opinion—and prices decline by 36%. That’s a serious savings. It’s not that unrealistic either.
While nobody is yet forecasting another Global Financial Crisis– “blood running in the streets” –personal circumstances can also create outsized opportunities. We bought our second website in October 2015 from a digital nomad who just wanted to live in Bangkok another two years. When his listing didn’t sell quickly, he got panicky and was very receptive to a down-bid. Last I heard, he’s still in Thailand doing FBA.
“Many have made small fortunes investing in the last two recessions and I’m eagerly preparing for the next one.”
What You Can Do
- Stockpile cash
- Sharpen your skill set
- Identify experts to help you when you’re an owner
- Determine where you can add value to a purchase
- Develop your ideal deal profile
- Build relationships with website brokers
- Review as many target market deals as possible
Don’t Buy Unless:
- The price reflects the new economic reality (and this will change)
- You have plenty of money to invest if prices go lower
- You find a “starter” site to sharpen your skills
- You identify a site where you can add material value
- You find a site that can be a platform to leverage for other investments
To be clear, there is a new economic reality that is not reflected in the prices of websites listed for sale today.
That economic reality implies lower economic growth with some risk of recession in the future—but a recession is not forecasted today.
Website investors have a unique opportunity to benefit from lower valuations. These website price reductions will result from lower monthly profits and lower multiples of profit.
Get prepared for a terrific opportunity.
Remember, “You’re just a deal away…”