Buy, hold or sell TradeMe with Amazon on the horizon?
As a small boy back in the 1970s I earned $11 a week delivering papers, morning and afternoon, for a newsagency in Melbourne's West Brunswick, and to this day I cannot forget how much I rued rainy Saturdays.
You see, back then the Saturday paper was enormous and heavy - thanks to the classifieds.
And back then there was no internet - indeed, we didn't even have the phone on until 1976 and our television was black and white. In the 1970s if you wanted to sell your TV, car or house, you listed it in the Saturday paper.
You paid by the line and most people were economical with their words, remembering that a three-bedroom house-and-land package could be picked up for $11,000 or a $1000 deposit and repayments of $22 a week.
How times have changed. Today the rivers of gold that were newspaper classifieds have all but dried up for the owners of printed newspapers and now accrue to online monopolists or duopolists.
REA Group dominates real estate classifieds in Australia. Carsales likewise dominates new and used auto trading locally and in New Zealand; TradeMe dominates all of the above as well as second-hand goods.
TradeMe (TME) recently fell 7% in a single day on the back of a broker report that downgraded its prospects amid an expectation that Amazon will enter the New Zealand market after it is established in Australia.
The suggestion is that after Amazon enters Australia next year it will begin fulfilling sales into New Zealand from Australia, reducing shipping times and costs relative to its current offer, which is delivered out of the US.
The note also suggests that TradeMe will need to come up with an "all-you-can-eat" freight offer to compete with Amazon Prime which will need to be partly subsidised.
It also suggests that a loss of share will feed into the virtuous circle for Amazon and adversely impact TradeMe's classifieds and advertising revenues.
We don't disagree that Amazon is likely to increase its market share in New Zealand.
Having fulfilment capability in Australia improves the competitiveness of its offering in New Zealand relative to its current position.
But we note that even if TradeMe never sold a single new product again from tomorrow, its earnings before interest and tax would fall by just 13%, which now appears to be more than factored into the share price.
See the September issue of Money for analysis on more businesses in this sector.