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Trademe worth a billion?

According to reports on the wires today, it appears that Fairfax may be considering flicking off all or part of TradeMe (TM) in order to appease investors who are a little concerned at the lacklustre performance of the group's newspaper operations.

The sale of TM would effectively inject as much as $1.6bn into the coffers and constitute a significant profit on the original purchase price of $700m.

That is, of course, if the valuation being touted for today's TM is accurate.

And how do you establish the true value of an online venture such as TM?

In the old days, the value of a company was usually expressed as a multiple of its earnings.

Traditionally, an earnings multiple of 10 or 12 was not too far from the truth. That is to say -- if a company earned $100m per year, its value was probably around $1Bn (ten times the earnings).

This simple calculation and the critical number -- the multiple -- was determined by the fact that it was very hard in the pre-internet era, for a competitor or a superior product to appear from nowhere and take over the market of an entrenched player.

So, if you paid an earnings multiple of 10 for a company then you could be pretty sure that you'd have the chance to recover much of that money from earnings before the risk of being displaced in the market by a new competitor grew too great.

However, these days we live in a much different world, at least as far as online ventures go.

It is not uncommon for new companies and services to appear one day and become the dominant player the next.

Just look at how quickly the other search engines crumbled once Google came on the scene.

Just look at how quickly FaceBook destroyed the market-share of Beebo and the like.

And what Apple's iPad has done to the netbook and notebook computer marketplace.

Even the unchallenged brand-leader Nokia faces a bleak future thanks to the rapid rise of Apple's iPhone and a plethora of Android phones.

The fact is that things chance so rapidly in the hi-tech markets of the 21st century that I don't think that high earnings multiples can be used when valuing a company which operates in these sectors.

Ultimately however, a company is worth whatever someone is prepared to pay for it.

When it was sold, TradeMe was certainly worth $700m -- because that's what Murdoch paid for it. However, I don't think it is worth twice that today. In fact, I would argue that it's no longer worth the original $700m.

Every product and service has a finite lifetime. The longer TM exists, the closer it comes to the day when someone rolls out a better, more attractive, more effective service that captures the hearts and wallets of TM's users.

Given the fickle nature of the Net-user, TM could see its revenues tumble in very short order - if and when such a service arrives on the scene. As soon as that happened, they'd be forced into playing catch-up and one only has to look at the history of online ventures to see that once dethroned, few (if any) once-leading services ever successfully make a comeback.

So, even though it might show growing revenues and profits, I would wager that the actual value of TM is now in decline.

The truth may be that, having seen how its MySpace venture was gutted in a few short years by FaceBook, Murdoch has also realised that it's better to sell TM now than later, if he's to make a profit or even recover his initial investment.

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