Tegna’s spin-off of Cars.com may well have just made domain sale history this year. As part of the business deal to sell the 19-year-old company, the domain name “cars.com” itself was valued at a whopping $872 million!
Can a domain name really be so highly valued?
It’s an exciting time in internet history since there are many rumblings that the sale of cars.com is the most expensive domain name in history. But is it true?
Let’s take a look under the hood to find out more.
‘Car Sales Megasite’ 📣
The company Cars.com was started in 1998 by a group of newspapers eager to continue gaining revenue from printed auto advertising but who also wanted a new souped up platform to ride the wave of the internet revolution of the late ’90s.
Since its creation, Cars.com has built an impressive stage that shows off a huge inventory of new and used cars and other vehicles. Described as “the most complete car sales megasite” by Library Journal, the site has detailed listings for sale, as well as financial calculators, dealership reviews and buying guides. Visitors to the site average 31 million per month, 50 percent of which come from a mobile device.
Cars.com also provides a range of business options to car brokers: social media strategies, advice on how to respond to negative reviews, analysis of online search patterns, and more. The company has grown to be one of Chicago’s largest digital media businesses.
Revenue of $633 million was reported for 2016, up 6 percent year over year, resulting in an 11 percent increase in net income and profits of $176.4 million for the year.
Why Was Cars.com Up for Sale? 🏬
Tegna, a broadcasting and digital-media giant, is the parent company who owned Cars.com and who decided to make the call to list the business publicly.
Why did they do this? Putting ourselves into reverse gear for a moment, we can follow the history of Cars.com down the winding road to lead us to where the company is today.
A Brief Look at the Ownership of Cars.com
Cars.com was originally owned by Classified Ventures, a joint venture among five major newspaper publishers that was formed to take advantage of revenue growth in online classified advertising. One of those publishers was Gannett Company.
Fun Fact 🎉
TEGNA is actually a partial anagram of the word Gannett.
In 2014, Gannett announced that it would buy all remaining shares of Classified Ventures from the other publishers, giving it full ownership of the company, including its primary asset – Cars.com. At the same time, Gannett announced that it would split into two independent companies. One, a publishing arm that would continue to use the Gannett name, and the other a broadcasting and digital company that would be named Tegna.
On May 4, 2017, Tegna shareholders gave the green light for an initial public offering of Cars.com as a publicly traded spin-off. This means that for the first time, the public can buy and trade Cars.com shares, under the ticker symbol CARS on the NYSE.
IPO Basics 🔤
In a nutshell, an initial public offering is when a company first offers shares of stocks to the public. It marks the beginning of a time when private owners of the company give up part of their ownership to public shareholders. This means that anyone can buy shares of, and therefore invest in, Cars.com.
There are many reasons to go public. One of the main ones is to allow the company to get enough cash – through the sale of stock to the public – for expansion. As a result, IPOs are generally viewed as positive since it signals to the world that a company is doing well and wishes to obtain more capital to grow.
Alex Vetter, CEO of Cars.com, has played a key role in orchestrating this spin-off and IPO. As such, he sometimes had to make tough decisions, such as reorganizing the company and laying off approximately three dozen employees earlier this year. “Throughout the last several months,” he explained in an interview with Chicago Business, “we assessed the skills needed to run as a stand-alone public company, and these changes will ensure our sustainable future as a leading digital automotive marketplace.”
Now that Cars.com has been spun off from Tegna, the company is created as a brand new, independent company.
In his Chicago Business interview, Vetter shared his thoughts on the future of car sales and the reasons for going public: “This industry will consolidate more over the next few years, and I think being a stand-alone, independently held company positions us to be one of the consolidators in the category.”
The IPO of Cars.com is a strategic move that keeps as eye on future developments in the automobile industry.
The Domain Name 📛
As exciting as the IPO is, what about the domain name itself, cars.com?
As with any big deal, care is taken to thoroughly understand the financials of the IPO and it is here we find much excitement in the valuation of the domain name.
What Makes a Domain Valuable? 🤑
Cars.com is short, memorable and garners a high search volume. Indeed, the keyword “cars” is searched more than 4 million times on average per month around the world and more than 1 million times on average per month in the United States. But it’s not just the SEO-potential that makes it so valuable.
The name cars.com is an exact match of the industry that it is trying to serve, which immediately defines it as a premium domain.
You want to buy a car? You type in “cars” in a search engine. Other examples of websites like this include computers.com, furniture.com or ticket.com.
Websites like these are known as category defining exact match domain names and garner some of the highest domain prices.
Starting to Value Cars.com 💲
The entire Cars.com company was valued at $2.5 billion back in 2014. But how do we get a domain value from there?
With a physical object like a car, it’s fairly easy to give it a value. One can use comparison sites, online tools or advice from a friend to compare the cost of one car to another. It happens every day on the Cars.com site: look up a used 2002 Toyota Corolla with upwards of 120,000 miles and you’ll see its value is around $2,000.
It’s up to you if you’d rather pay for an old banger station wagon from 1978 versus a shiny, new 2017 Audi TT model, but either way, you can easily get a rough idea of a car’s worth without burning too much rubber.
But with something non-physical like a domain name, how do you give it a price?
It seems like such a simple string of letters when written down, but we need to do a little detective work to understand how such a domain is valued.
Finite-lived vs. Indefinite-lived Intangible Assets 📒
Intangible assets – that is, assets of a business that are not physical in nature – are key to this valuation. Patents, trademarks, copyrights and goodwill are all examples of intangible assets – they provide great value to a company but aren’t physical “things.”
Intangible assets can be classified as finite-lived or indefinite-lived.
A good example of a finite-lived asset might be if a company enters a legal agreement to operate under another company’s fixed-term patent. The patent is said to have a limited life and is classified as a finite-lived or definite asset.
Conversely, an indefinite-lived intangible asset doesn’t have any kind of time limit on its expected useful life. An example of this type of asset? Yep, you guessed it – domain names.
Valuing Cars.com 🤓
As part of any IPO, a newly traded public company is required by law to complete a Form S-1 and file it with the U.S. Securities and Exchange Commission (SEC). Digging through the S-1 document filed for Cars.com Inc on May 11, 2017, we start to learn a little more about how the value of cars.com was calculated.
As outlined in the Cars.com Inc SEC filing, the indefinite-lived intangible asset value, or the price of the cars.com domain name, is calculated by the “Relief-from-Royalty” method:
The estimate of fair value is determined using the “relief from royalty” methodology, which is a variation of the income approach.Cars.com Inc. Form S-1
Relief-from-Royalty Basics 🔬
This methodology is a variation of the income approach, which considers an asset’s expected future cash flows and weighs it against the risk of investment. More precisely, it values the hypothetical payments that would be saved through owning the asset, compared with licensing it from a 3rd party. (Source)
For the domain cars.com, this method considers the value created to the owner by historical earnings from the Cars.com website and how much future cash flow the domain name is expected to generate over its life.
The cars.com domain valuation requires a good estimate of future cash flows and their risk. To do this, estimates are calculated based on revenues received from advertising on the site, as well as historical data, in addition to public data such as keyword trends and searches.
All these factors are used to model projections for future cash flows.
Impairment Losses 📌
Let’s change gears for a second and look at how impairment – one of the main aspects of the Relief-from-Royalty method – affects the cars.com domain name.
The risk of future cash flows is one of the hardest parts to calculate and can change quite dramatically due to a variety of circumstances. This is where impairment costs come in.
Loosely defined, impairment is a permanent reduction in the value of a company’s asset in the accounting world. It is tested annually or more frequently if there is deemed to be a significant event.
In the special case of indefinite-lived intangible assets, the fair value of the asset (i.e., the estimate of the market price of an asset based on future cash flow) is compared with its book value (i.e., the amount that the company has on its books, or accounts, for an asset). If the book value is higher than the fair value, the company must recognize an impairment loss for that asset, and the asset value declines on the company’s balance sheet.
For a domain name, impairment losses could include a damaged reputation or, a new use or meaning for the name.
In the Cars.com SEC filing, the annual impairment test showed that no impairment loss existed for 2016.
… “no impairment existed” – no impairment losses noted for 2016 is a good sign for the future of cars.com and shows that the value of the domain name remains strong!Cars.com Inc. Form S-1
The Domain Value 💰
So, using the Relief-from Royalty method for the indefinitely lived intangible asset and factoring in impairment losses, how much is the domain cars.com worth?
The answer lies in the table below as outlined in the SEC S-1 filing, which has come into light thanks to the IPO.
This data gives the fair value of the assets obtained when Gannett acquired Classified Ventures, and thus gives the value of cars.com when it came under Tegna ownership (values in thousands):
Source: S-1 Form for Cars.com Inc., page F-9
The value of the domain name is the total of the line “Indefinite-lived intangible assets.”
The answer: $872 million for the domain name of cars.com. Wow!
Cars.com reported that the domain name represented 34 percent of company assets at December 31, 2016 – $872 million is approximately 34 percent of the $2.5 billion deal value. That amount of money could go a long way in pimping your ride….
The domain price is also referenced in the Form 10-K which the Gannett company filed with the SEC in 2014:
After the impairment testing date, we completed our acquisition of Cars.com and as a result recorded an indefinite-lived trade name valued at $872 million.Cars.com Inc. Form 10-K
How Does the Value of Cars.com Compare With Other Domain Name Sales? 📊
Before the Cars.com deal, the sale of insurance.com for $35.6 million in 2010 was the most expensive domain name that was for sale. But now, the value of cars.com completely crushes all others!
Valuing cars.com at $872 million means that the value of the domain is more than 20 times greater than the previous largest domain sale. In fact, cars.com even dwarfs the sum of the entire Top 10 previously most expensive domain name sales listed on DomainSherpa. That’s seriously impressive!
The Most Expensive Domain Name 🏆
Hold on, even after taking a deep dive into what drives the price of cars.com, a value of $872 million still seems really high for just a domain name, right?
Well, no, not when you consider just how much automakers spend on advertising each year. Cars sales and particularly car sales advertising is a megamillion-dollar business. With the most premium domain name in the industry, it’s no wonder that the valuation for cars.com sits at well over $800 million.
Take a look at some of the annual ad spending by the top automakers in 2015:
As you can see from Ford and GM, each company’s total yearly ad spending was more than quadruple the valuation of the domain cars.com, and up over 8 percent from the previous year, signalling a huge amount of potential for Cars.com.
Given the staggering annual spend on advertising, the frequency of internet searches for “cars” and the indefinite life-span of the domain name, it starts to become clear why cars.com is valued at a mega $872 million.
1.2 billion vehicles are currently on the world’s roads and reports suggest vehicle numbers will hit 2 billion by 2035. Thousands of hits daily on major search engines are for new or used cars for sale and there’s no reason to expect searches will be slamming the brakes anytime soon.
Around the globe the future use and growth in production of cars looks to be in line with population expansion, which means almost certain growth for the automobile industry. For the newly created Cars.com, this means it’s time to fire on all cylinders and get ready for the future.
Buckle up: it’s time to get this show on the road.