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Is a domain portfolio an asset?

Labeled as discuss in General Domain Discussion, started by garptrader, May 21, 2016

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  1. garptrader

    garptrader Top Contributor VIP ★★★★★★★★★★

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    Quite often domain investors who have been in domaining for any considerable period of time have accumulated hundreds or in some cases thousands of domains. A portfolio of stocks can be valued based on the current trading price of each stock. Domains are not as easily valued.

    Retailers will often value their inventories at cost for financial reporting purposes. They may have acquired an article of clothing for $10 which retails for $25 but it appears on the books at $10 in the year-end balance sheet. Electronics retailers have to be particularly careful with inventory because technology can cause older SKUs to lose their value even below the original cost. In such cases, a lower of cost or market valuation may be used.

    A retailer will generally only order items it believes it can sell at a price above cost. Likewise, a domain investor will generally only acquire domains at a price below what they believe the domain can be sold.

    So if a domain investor only acquires domains they believe can be sold at a price perhaps well above cost, does cost have any baseline meaning for domain portfolio valuation purposes? The challenge lies in renewals which makes domains somewhat like options which expire "out of the money.\" if not sold prior to expiration. Of course a domain can be renewed but that requires additional resources again and again and again etc if buyers do not show up. Again, most domain portfolios have very low annual turnover and thus the majority of the portfolio needs to be renewed - hopefully with funds from sales.

    Of course if a ten-domain .COM portfolio regularly receives $XXXX offers on each of its domains, the $100 in renewals is not an issue. On the other hand, registering 100 20-character domains with random characters and numbers is not likely to generate anything other than renewals.

    So how does one determine if a portfolio is an asset or merely an expense?
     
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  2. William V

    William V Established Member

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    Technically domain names are a contract for service, much like your cable or phone service. You don't "own" your phone number but it is reserved for you while you are under contract.
     
  3. DNScholar

    DNScholar DNScholar.com

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    So how does one determine if a portfolio is an asset or merely an expense?

    The answer is by evaluating domain facts, past sales and present circumstances all goes to appraise portofolios.
     
  4. DU

    DU Secret Santa VIP ★★★★★★★★★★

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    Are you asking from a true accounting / balance sheet perspective? Or just a more basic - how do you value domains?
     
  5. Keral_Patel

    Keral_Patel I'll do it

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    It is an asset as long as you live or someone else handles it afterwards.

    Once you are dead. It will be auctioned off on Snapnames or Namejet and people will bid on it :)

    That is the kind of asset the domain name is :)
     
  6. garptrader

    garptrader Top Contributor VIP ★★★★★★★★★★

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    An asset is something which has an expected future economic benefit which can be converted into cash. As an example, shares in SPY which represents many of the largest companies could be sold for cash. Depending on the date of purchase and sale, the sales price might be more or less than the purchase price. Likewise, a home could be considered an asset as it is a place people can live and might be willing to pay monthly rent to a landlord to stay there.

    But assets which are acquired with debt are tricky. During the real estate boom of 2002-2007, real estate prices went up quickly and many individuals including realtors were buying portfolios of homes, pre-construction condos, etc with interest only financing in anticipation of future price increases which could be flipped at a profit to pay the corresponding mortgage. I knew a realtor who had a portfolio of such properties. Her home, acquired during the boom, had a $1 million mortgage, but after real estate prices collapsed 2008-2010, the home was only worth $300k. Yes, the home still had a value as a place to live, but the cost of owning those properties (mortgage, insurance, property taxes, maintenance, etc) was more than the underlying resale or rental value. Essentially their real estate portfolio was worthless. They declared bankruptcy.

    On to domains - sales are only a metric as even Rick Schwartz does not sell a domain every day. His portfolio does receive regular offers however, most which he turns down. If a large portion of your portfolio regularly receives $XXXX or even low $XXX offers, you likely have some domains with value to someone. Up until a few years ago, SEDO would produce quarterly sales reports indicating that the median .COM sales price going through their platform was about $600. Yet if average industry portfolio turnover is only 1% and .COM renewals are close to $10 annually, what does that say about the value of the average industry domain portfolio ($600 less 20% commissions less $1000 in renewals for a 100 .COM domain portfolio)? Turnover and average sales prices for alternative extensions tend to produce less favorable metrics.

    A domain portfolio is not necessarily an asset if the domains in that portfolio are not desired by someone willing to pay a high enough price for them to exceed the cost of renewing that portfolio. Premium renewals are problematic as they create a high hurdle for the investor. While I have sold .Net, .Org, .BIZ and .TV domains, in recent years my tendency has been to prune holdings in those alternative extensions to reduce the carrying cost of the portfolio. Even with .COM, I have been pruning what I perceive to be lesser-quality domains. Even a pure .COM portfolio is not necessarily an asset if no one is willing to pay more than reg fee for those domains (the cost of renewing them).
     
  7. Asfas1000

    Asfas1000 Top Contributor VIP

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    Based on this definition, one can declare a domain portfolio as an asset. The tricky word here is "expected", which is quite vague (expected by whom, based on what data, at what degree of certaincy etc)
     
  8. garptrader

    garptrader Top Contributor VIP ★★★★★★★★★★

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    If a domain portfolio has a less than 1% portfolio turn with only occasional low-dollar sales and is generating more costs (renewals) than sales or potential sales (offers which could be converted to cash if accepted), then one could question whether there is an expected future economic benefit. It is difficult to expect a future benefit in the absence of convincing evidence to sustain that belief. 1% portfolio turnover is believed to be normal in this industry but I have observed in recent years that the number of low $XXXX and high $XXX sales has been on the decline. In 2010 I had thirteen sales $750 or higher. Last year I had two. Perhaps Google search algorithm updates affected the value of exact match domains. Perhaps the usage of social media sites (Youtube, Facebook, Twitter) for an internet presence rather than using a real domain had an effect. Perhaps the launch of hundreds of new TLDs has given low-budget buyers (including domainers) which previously might have paid low $XXX for an aftermarket domain more options. Who knows?

    If I see on Godaddy Auctions that a domain of mine priced low $XXXX or even high $XXX has hundreds of offer page views, perhaps that is an indication someone would be willing to pay $50 for it maybe more. If the domain has premium renewals then the renewal costs significantly reduce any expected future benefit as years of renewals on a domain portfolio filled with premium renewals may result in sales not covering renewal costs. Of course this can happen with any TLD or portfolio type even with regular renewals if the portfolio quality is not attractive to potential buyers.
     
  9. Asfas1000

    Asfas1000 Top Contributor VIP

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    Exactly, and that's how you define "expected" value based on your own experience . If you were a web developer you might have evidence that a domain is desirable from your clients' feedback.
     
  10. DU

    DU Secret Santa VIP ★★★★★★★★★★

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    I'm not sure what you're trying to ask with your questions. You are talking accounting principles without really looking at things correctly.

    Example:
    It's not tricky - Assets = Liabilities + Equity. Negative equity is when your liabilities exceed your assets.

    Domains are rarely bought with debt.

    A portfolio is most likely a non-current asset with a cost-basis (which could be amortized if large enough) and the renewals would be expenses (not liabilities). Non-current just means that it's not truly "liquid".

    The cost-basis (if accounted) is important from a realized gain-loss perspective but would not impact the current market value but that's true in stocks as as well (though you would have more accurate unrealized numbers.).

    The portfolio is always an asset but you're just in trouble if your expense accrual is greater than available cash. At that point you will discover if you have true assets or not :)

    But I'm not really sure what you're asking or pointing out the obvious - if you are trying to sell but can't and you have renewals coming then you're not doing very well :)
     
  11. biggie

    biggie GreenFriendly.com VIP ★★★★★★★★★★

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    Is a domain portfolio an asset?

    it's an asset and an expense

    when the expenses are lower than the income generated from it, then the portfolio earns a return.


    but it always depends on the collection and the assessor, if you're looking to cash out.


    imo...
     
  12. platey

    platey Top Contributor VIP

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    brilliant article

    somewhere in there is a portfolio equasion eg portfolio cost v sales less renewals and reinvestment in new domain purchases etc = profit? or something similar
     
  13. Kate

    Kate Domainosaurus Rex VIP ★★★★★★★★★★

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    If your sales revenue + parking revenue > expenses
    then your portfolio can be classified as assets
    otherwise: liabilities.

    This is my baseline, I think it's the only thing that is relevant.

    But even as assets, domain names are very illiquid except for certain types of domains like LL/LLL.com which actually enjoy the equivalent of the current trading price of stocks (due to the existence of the reseller market). Right now any LLL.com has immediate, liquid value. These names can be valued and traded accordingly.
    But most portfolios probably have a liquidity rate of almost 0%. If you need to raise money fast, how many names can you realistically liquidate in a short time frame, and how much will you fetch ?
    Domain sales are infrequent, unless you are a large outfit such as Buydomains, that must have a regular revenue stream that is more or less predictable.

    Frequent inquiries suggest that there is at least some interest in your names. That doesn't mean people are ready to pay the price, but at least you own something that other people want.
    If you own hundreds of domains and never get any inquiries or unsolicited offers after several years, this is a worrying sign. It means: stop dreaming.

    I think that most of the time, the answer is that portfolios should qualify as speculation.
    PS: I don't have a background in finance :)
     
  14. platey

    platey Top Contributor VIP

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    fantastic reply

    i love the phrase stop dreaming lol

    but you are right as a portfolio that has zero sales {like mine lol} zero parking like mine plus renewal fees etc is pure liabilities - should i stop dreaming now or later lol
     
  15. platey

    platey Top Contributor VIP

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    great last sentence, appeals to my sense of humour

    but the majority if not all domain investors start off with a deficit after initial investment its wether the quality of the names purchased are of sufficient quality to produce enough sales to reduce if not cover initial investment and provide an investment
     
  16. Asfas1000

    Asfas1000 Top Contributor VIP

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    You can't incorporate the 'sales' factor in the equation, sales mean deals. One can have a superb portfolio but no sales because he's askin too much (think Rick S.)
     
  17. biggie

    biggie GreenFriendly.com VIP ★★★★★★★★★★

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    if you're talking about "potential sales", that too can have a value even if as you say "he's asking too much", as the portfolio could still be seen as having value, just at a lower amount than what the owner (Rick S) would sell for.

    as i'm sure if you could pick and choose from his list, you'd find some valuable assets.

    imo....
     
  18. platey

    platey Top Contributor VIP

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    good point made

    certain valuable domain portfolios will increase in value even if no sales are made from the portfolio due to the sheer quality of the domain names in such a quality portfolio as the price of domain names generally increases in value but certain portfolios like the one mentioned are almost like investment vehicles that i can only presume can acquire top level .com's etc as and when it suits
     
  19. DU

    DU Secret Santa VIP ★★★★★★★★★★

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    Past Performance Is No Guarantee of Future Results... blah blah...
     
  20. garptrader

    garptrader Top Contributor VIP ★★★★★★★★★★

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    I suppose if one adheres to the statement, "a domain is worth what someone is willing to pay for it" then at a domain level you could value each domain in a portfolio as....

    DV=(PB x PS) - AP- (ARxYS) + PRS - MC
    DV=domain valuation
    PB=Price a buyer (ideally an end user with a strong need for the domain) is willing to pay to acquire it
    PS=Probability of that domain selling given that a list price or price quote well above a buyer's willingness to pay for it may result in the domain not selling to even the ideal buyer (i.e. seller wants $50k but buyer is only willing to pay $500)
    AP=acquisition price
    AR=annual renewal unitl the domain is sold or dropped
    YS=Years a domain must be renewed until it sells
    PRS=parking revenue until domain sells
    MC=Marketing costs incurred whether they be a marketplace commission or paying a broker to do outbound marketing or an estimate of the value of one's time spent on outbound marketing efforts (while not cash per se time does have a value and oftentimes time spent on outbound marketing might be better spent on more productive activities)

    Note I have not considered the time value of money as a sale ten years from now is worth less than a sale today though the ideal sales price is normally going to be a passive sale one waits years for rather than an active outbound effort where aggressive pricing yields quick cash flow.

    So if a domain never sells the domain investor loses not only the initial investment but also all renewals until the domain is dropped. This is the danger of the newbie handreg - dozens or maybe hundreds of cheap domains of dubious value end up getting renewed and costing more than a true-premium domain which could be acquired at Namejet and which would have a higher likelihood of finding an eventual buyer.

    The main point that needs to be emphasized is that one cannot arrive at a portfolio value by taking the list sales price for each domain and adding up the numbers. Without a buyer, each domain has a negative value because renewals will have to be paid to maintain the portfolio. Portfolio turn is primarily a function of domain quality and pricing but is key to overcoming the hurdle of renewal costs.
     
  21. Asfas1000

    Asfas1000 Top Contributor VIP

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    Agree with your calculations garptrader...

    Few points :
    - probability (that anything happens) is subjective and based on one's best knowledge. Another domainer will estimate different numbers and come to different valuations, which is reasonable
    - PB x PS : you typically have multiple potential buyers so this part needs some refining
     
  22. stub

    stub DNStore.com PRO VIP ★★★★★★★★★★

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    I circumvent this whole discussion by operating on a cash flow basis :) A domain doesn't have any value beyond the current year of registration. If I die during the current year of registration, whatever value I put on a domain, it will not be realized. I do not have a great line of succession worked out yet, but at least I'm working on it. You should too.
     
  23. DNScholar

    DNScholar DNScholar.com

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    Also wanted to add If you develop a domain than revenue you make is important asset and If you park and looking for sale than depends on your marketing knowledge/sale experience.
     
  24. Joseph Green

    Joseph Green Established Member ★★★★★★★★★★

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    Here's how to determine the value of your portfolio:

    Create a spreadsheet with every domain name in your portfolio, and then find out the highest offer you've ever received on each domain name.

    The spreadsheet should have these two columns: Domain Name | Highest Offer

    Once you have that data in the spreadsheet, sum up the Highest Offer column. That sum is roughly the liquid value of your portfolio. If it does not far exceed your cost (purchase prices and renewals) of the portfolio, then something is very wrong in your business strategy.

    * When you first start out, you won't be able to use this method because it depends on time and quantity.
    • Time: You'll need to have your portfolio for at least a year or two, ideally 3-4 years.
    • Quantity: Anywhere from 50-150 domains will be enough, but the true value of this method will shine when you have 500+ domains.
    Even after only a year with as few as 50 domain names, it will begin to paint a picture of where your portfolio is headed in terms of value.
     
  25. Joseph Green

    Joseph Green Established Member ★★★★★★★★★★

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    Big portfolio holders like Mike Mann, Frank Schilling, HugeDomains, and BuyDomains sell a lot of domains each day. Mike Mann often reports 20+ sales per day on Twitter, and he has the smallest and lowest-valued portfolio of the ones I listed.

    As someone with a diversified portfolio, I can say with 100% confidence that you've experienced this because the naming conventions and trends for startups and businesses have changed, which changed their buying behavior and desires. Very few companies are interested in EMD's (Exact Match Domains) anymore.


    Diversify and adapt:

    You have to follow the trends, and that's the biggest risk in domaining: investing too much in a trend and then it changing. A good example is the (word).ly and (word)ly.com trend that was really popular for a couple years when Bitly first became popular. Smart investors made a lot of money on that wave. That trend has fizzled down considerably, so if you're left holding too many of those types of domains, it's time to sell them at any price and find the next naming convention that companies want to use.

    My sales have been more frequent and larger this year than years past. The most popular buying trend that I'm seeing is one-word domains on a sensible extension. There may be even hotter trends that aren't in my portfolio. The key is finding them early and investing before the surge of demand hits.
     

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