MIDAS SHARE TIPS: Internet domain name firm CentralNic has .buy written all over it with its 51.5p share price set to rocket
CentralNic is a big player in a vital part of the internet. The firm owns and sells top-level domain name suffixes, the letters that immediately follow the dot on website addresses. Its share price is 51½p and this should rise considerably as the business expands.
The first top-level domain (TLD) was .mil for the US military. Then American universities were given .edu and the US department of commerce .com. That was back in 1984. Country codes were also established, such as .fr for France.
Few people back then had any idea how integral the internet would become to everyday lives, so a number of countries sold their codes to the first available buyer.
Centralnic is a big player in a vital part of the internet. The firm owns and sells top-level domain name suffixes, the letters that immediately follow the dot on website addresses
By the mid-1990s, a brisk trade had developed in these codes, and the founders of CentralNic – UK property developers by profession – spotted an opportunity.
Over the years, they built a registry of top-level domains, such as .fm – originally for the Federated States of Micronesia, a country of 600 islands in the Western Pacific, but popular with radio stations – and .la – originally for Laos, but popular with firms in Los Angeles.
The business ticked along nicely, but in 2012, the domain name industry began a process of radical change, when the powers that be – under the auspices of a global body called The Internet Corporation for Assigned Names and Numbers – allowed people and organisations to create their own top-level domains.
The process is long and arduous to deter rogue or foolish requests. Applicants must pay $185,000 (£140,000) just to apply for a new, top-level domain, and must pass rigorous checks to ensure they are bona fide. Today there are about 1,200 new, top-level domains and CentralNic is the world’s leading distributor, with six of the top 20, such as .online, .website and .xyz.
The company was listed on AIM, London’s junior stock exchange, in 2013 when the domain name revolution was just starting. The shares were priced at 57p and CentralNic was purely a distributor.
In other words, it sold the right to use these suffixes to website registrars such as the American firm Go Daddy or the German firm 1&1, which then sold them to individuals and firms.
Today, there are 100 million websites worldwide, most run by North Americans or Western Europeans. But firms in emerging markets are rapidly moving online
Recently, however, CentralNic has expanded into the end-user market, becoming both a wholesaler and retailer. At the end of 2015, the firm paid £18 million for Instra Group, an Australian-based domain name registrar aimed at emerging markets.
The acquisition was astute. The rules surrounding domain names may sound complex and arcane, but no one can set up a website without licensing a top-level domain from a registrar.
Today, there are 100 million websites worldwide, most run by North Americans or Western Europeans. But firms in emerging markets are rapidly moving online. As they do, they need a reliable registrar.
Having acquired Instra, CentralNic is well positioned to benefit from this as thousands of businesses in regions such as Asia and the Middle East launch websites.
The acquisition is already reaping returns. In 2016, CentralNic’s turnover rose 113 per cent to £22 million, while underlying profits were up 68 per cent to £5.5 million. Further rapid growth is expected over the next few years, both organic and from future acquisitions.
Annual costs for licensing a website address are modest, but firms tend to stick with the same provider and pay in advance, so revenues are solid and predictable. Most providers offer related services too, helping customers build and manage websites, for a fee.
There are hundreds of small firms operating in the top-level domain industry – some owning the names, some distributing them, some selling them to end-customers. But the sector is expected to consolidate over the next few years, creating a handful of dominant players.
CentralNic, run by ambitious Australian Ben Crawford, is keen to participate in the consolidation process. If all goes well, that should mean expanding to a certain size before being taken over by a giant in the industry.
Midas verdict: CentralNic did not have the easiest debut on AIM. The shares doubled in the first few months, only to collapse to 25p as enthusiastic buyers came and went. Today, however, at 51½p the stock is a bargain. Crawford’s strategy is entirely logical and the shares should go far. Buy.