Comparison website iSelect released its prospectus last week ahead of an initial public offering (IPO) of shares in the company. The firm is scheduled to list and begin trading on the ASX on Friday the 28th of June. While iSelect's major business line is selling health insurance, it also offers a wide array of other industry comparisons. Given its online-focused business model, an evaluation of iSelect's business model, potential and value requires a comparison with other listed online businesses.
Trade Me Group (ASX: TME) the New Zealand-focussed online classifieds advertising platform provides the most recent and perhaps the closest comparison to iSelect. Trade Me only listed in December 2011, but in that time its shares have gained 86%.
Employment advertiser Seek (ASX: SEK), motor vehicle advertiser Carsales.com (ASX: CRZ) and REA Group (ASX: REA), the owner of the realestate.com.au website are all leaders in their respective fields and well known to investors. Equally well known it the tremendous share price gains they have provided shareholders. As the chart below shows, all three companies have significantly outperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the past five years.
Source: Google Finance
While the latest IPO of an online business is no doubt appealing to many investors, it is worth taking a cold shower for a moment and remembering that, like Warren Buffett says, "Price is what you pay but value is what you get!"
The prospectus states that at the offer price of $1.85 per share, the forecast price-to-earnings ratio is 25.4 times. This places iSelect stock right up there with the lofty valuations of its major peers mentioned above. Anyone paying these prices would presumably not only expect but also need earnings growth of well over 20% per annum to justify this share price – and that is just to justify the price, let alone for the share price to re-rate higher.
Foolish takeaway
A chart of rocketing share prices is sure to fire up many investors' endorphins. While in this case there is a decent correlation between the growing profits of these well positioned online businesses and their increasing share prices, Foolishly we aim to stay firmly focussed on valuations not charts.
One of the most important questions to ask oneself after reading all the 'hype' and 'spin' in a prospectus is, "if this company is so great, then why are the vendors selling it to me?"
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
