Dear Reader,

Mention the words “Internet” and “investment” in the same sentence and many experienced investors go slightly green around the gills. The dotcom bust of the early 2000s is still too fresh in their minds. Nowadays we hold up the period as an example of what unparalleled greed, clever marketing and an unquestioned belief in technology can do to markets. Back then it was real!

What happened? Over the six years beginning 1995 tech savvy entrepreneurs latched on to the potential the Internet offered to radically change the way the world did business. What followed was a feeding frenzy triggered by venture capitalists that backed any company with “e” in front of – or “dotcom” behind its name! The tech heavy NASDAQ Composite index climbed from 1,000 points to 2,000 – to 2,500 – and then doubled in a single year (1999!)

Computer geeks in suits convinced businessmen to part with thousand of dollars in start-up funding and proceeded to “burn” this cash on advertising, salaries and other operating expenses, doing anything to keep the “hype” around their company alive… Many of these firms opened and closed their doors without generating even a sliver of revenue!

At the height of the market bubble – 10 March 2000 – the NASDAQ reached 5,048.62 points. And that’s when the companies built around nothing more than ideas and an IT guru’s “say so” came crashing to the ground.

While researching the collapse I was surprised to learn that the sell-off began with respectable “bellwether” stocks, the likes of Cisco, IBM and Dell. Whatever the case the NASDAQ opened 4% softer on Monday 13 March, at 4,879 points.

And website wikipedia.org documents the collapse that followed: “In just six days the NASDAQ had lost nearly nine percent, falling from roughly 5,050 on March 10 to 4,580 on March 15.” And on 3 April another IT giant, Microsoft, was declared a monopoly – triggering a fresh bout of selling. By year-end the tech index was floundering below 2,000 points.

Why this sudden obsession with a market event that took place a decade ago?

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Modern day dotcom or genuine profit opportunity

I decided to revisit the dotcom bust after reading a Financial Mail article about prospects for two of South Africa’s listed media and entertainment companies. The company that caught my eye is Naspers Limited (JSE: NPN). The group operates four divisions loosely described as Internet, Pay-TV, Technology and Print Media. Given its risky Internet investments and relatively high price-to-earnings ratio (PE) I wanted to work out whether the company offered a genuine profit opportunity or was simply a “dotcom” sailing to failure...

The answer lies in the group’s Pay-TV operation, which contributes the lion’s share of group revenues (a total of R10.186bn in the six months to 30 September 2010) and now boasts 3.2 million subscriber households in South Africa plus a further 1.2 million households throughout sub-Saharan Africa. The 2010 FIFA World Cup ™ resulted in a surge in new business and a 20% spike in revenue. You’re probably quite familiar with the M-Net, M-Net Super Sport and DSTV brands! And you probably also know how easily Naspers can squeeze 10% extra from these subscribers...

But the company’s real potential centres on a handful of carefully chosen Internet businesses, which are growing at – dare I say it – dotcom pace! Overall the internet segment reported revenue growth of 54% (to R5.514bn) with an even more impressive 73% surge in trading profits, to R1.781bn. The cornerstone of the Internet division is the group’s 35% stake in Chinese tech company Tencent, which contributed R3.3bn to group revenue and a whopping R1.7bn trading profit.

Another top asset in the Internet division is the recently listed Russian Mail.ru group. Although this investment showed losses in the latest period, few doubt it will provide lucrative profits in the future. Naspers has also invested in a number of e-commerce operations such as Allegro (Eastern Europe) and Ricardo (Western Europe). Both are expanding through new product offerings and smaller acquisitions. Why do I believe Naspers is a profit opportunity? Because unlike the dotcom companies it is actually making money from its Internet investments!

I’m not going to bore you with results from the Technology and Print Media divisions – because for the purposes of this brief article the “big hitting” divisions offer more than enough ammunition to fuel my debate.

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Here’s why you should pay over the odds for this Internet giant

Why are punters prepared to pay over the odds for Naspers? Are you sitting down?

Tencent’s QQ platform now manages 636 million active instant messaging (IM) user accounts, with 116 million concurrent users at peak! We’re talking staggering numbers of users who will generate untold future revenues for Tencent – and of course Naspers.

And that’s why Prudential Fund Managers analyst Chris Woods told the Financial Mail that “investors in Naspers will still gain value from the share.” He reckons the investors who snap up Naspers at R375/share are picking up exposure to Tencent at a 30% discount... It’s simple math really…. The Tencent investment is worth around R280/share – and the Pay-TV business is worth way more than R95/share that “remains”.

I’m willing to stick my neck out and say Naspers will outperform the JSE All Share index over the balance of 2011 – and through 2012 too. The company is trading off a 20.6 times one-year forward PE (to September 2011) – but the ration drop substantially to just 13.10 times by September 2013.

A company such as Naspers – with its fast growing Internet and Pay-TV businesses – isn’t going to trade at a 13 times PE for long – which means the price will soar! You can accumulate the counter at below R300/share… If the analysts have their numbers right then this company should be changing hands at R600/share by September 2013.

I’ll be back with another Money Morning instalment on 14 April 2011.

Until then, let the profits roll,

Gareth Stokes