Internet IPOs: After the bumper listing of online food delivery platform Zomato, many more internet companies are planning to enter the stock market. Due to this, many such questions are swirling in the minds of investors that which model, which vertical or which company would be better to invest in. Paytm is also going to enter the primary market in the current financial year 2021-22 and Nykaa’s IPO is also coming soon. In such a situation, to remove the confusion of investors, brokerage and research firm ICICI Securities has suggested five criteria before investing in internet companies.
According to analysts, valuations for GMV (Gross Merchandise Value), near term losses/valuations are no longer dominant and long term sustainability, sustainability and profitability are sometimes seen as exaggerated. In such a situation, according to ICICI Securities, investors should focus on frequency of app usage, available market, data monetizability, back-end operation issues and unit economics in case of IPO of internet companies.
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App usage frequency
According to analysts, if an internet company’s app is using more frequency, then it means that its customer engagement and scalability is high. Most of the users keep limited apps due to memory issue. In such a situation, in the case of Internet companies, the focus should be on customer engagement, behavioral data, brand loyalty, network size and scalability.
Total available market (TAM)
From the established Internet business, it can be guessed that to earn more profit in the industry, there should be either monopoly or duopoly. According to the brokerage firm’s report, the lower the Total Availability Market (TAM), the higher the competition in the industry and the lower the profits, while conversely, higher TM per player leads to better risk-reward pay: op for the investors. They get better returns on risk.
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Data is fuel in the digital era and internet companies have a lot of user data. In such a situation, the use of this data can play an important role. According to the brokerage firm, investors should identify the model of more data monetization. This means that it must be ascertained that the extent to which the internet company he is considering investing in, can monetize the data, it must be assessed.
Back-End Operational Muscle
The operation model of Internet companies must be effective in order to retain customers. If a customer is on the platform of an internet company, it is the back-end operation that helps to keep him connected to his platform. Satisfied customers increase the chances of staying with the company for a longer period of time. According to ICICI Securities, companies like Tiny Owl and Doormint disappeared due to their operational weakness.
This is a very important part of any internet company and it is very important to assess how long the company is going to remain in the market and how its profit is. Most of the better internet companies are not profitable like Zomato. The biggest reason for this is that such companies spend a lot on marketing, advertising and promotion, discounts, cashback. These expenses are done for connecting more and more customers to your platform and for your branding. These expenses (front-ended investments) provide back-ended benefits. Investors should identify businesses with better unit economics or contribution margin before marketing overheads. Contribution margin means profit earned per unit sale.
(Article: Kshitij Bhargava)