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Internet Valuation Oct 2013 - What Price is Right?

Internet ValuationThe IPO of Twitter has put a spotlight on a core question:  What is an Internet company worth and what is the right combination of valuation metrics? Why does Linkedin have a higher valuation multipe than Facebook? How much will Twitter be worth over the longer term horizon? Which Internet firms are mispriced?

In this research report we describe a practical formula-based valuation approach for valuing Internet companies of all sizes. Our quantitative analysis indicates that growth is the most important factor in determining valuation of an Internet business.

As of October 29th 2013, shares of publicly traded Internet companies have generated an average YTD return of 58.52%. A number of firms, e.g. Yelp, Trip Advisor and a few others, have seen moves of well above 100%. Internet companies on average trade at over 7X revenue with larger firms fetching multiples north of 11X. Venture funding and secondary market sales of privately held Internet firms are priced generously even for firms that have little or no actual revenue. Any hint at an Internet bubble invites fiery reminders that one is paying for exceptional growth. The purpose of this research note is to identify parameters and metrics that drive valuations of Internet social media companies and provide key holders, investors and bankers with a simple and practical alternative valuation model - not to call attention to inflation in equity prices.

In the Internet and social media context traditional valuation methodologies such as DCF are often unusable. We have applied our Empirical Valuation Modeling (EVM) approach that has been well-tested in the SaaS space to Internet companies. The result is a simple set of guidelines and formulas for valuing Internet businesses. We have previously tested the EVM approach after the Facebook (FB) IPO and at the time generated a price target of $18 – a level that FB eventually not only hit but stayed around for a long time. The EVM approach has proven significantly predictive of take-out prices for SaaS companies with several acquisitions priced within 5% of the target predicted by our valuation model. Some of the SaaS acquisition targets had announcement date pricing moves of up to 40%. This research report describes the methodology, assumptions and results of our application of EVM to the Internet sector, highlights pricing anomalies, provides recommendations for formula use and spotlights the potential valuation of Twitter. We analyzed various operating and valuation parameters of 35 publicly traded Internet firms of various sizes and included data from Twitter data based on its pre-IPO filing.

Key Issues

 

  • What are the correct metrics for Internet company valuations?
  • How will mobile impact growth trajectories for leading social media firms?
  • What attributes separate top and bottom ranked Internet companies?
  • Are Internet companies over or under-valued?

10 pages

Includes charts, tables and formulas for valuation of Internet firms of different sizes, public and private, profitable and unprofitable.

DISCLAIMER: NOT A RECOMMENDATION TO BUY OR SELL SECURITIES OF ANY KIND

Companies discussed in this research report include:

  • Google Inc
  • Facebook Inc
  • eBay Inc
  • Priceline.Com
  • Baidu Inc
  • Yahoo! Inc
  • Linkedin Corp
  • Yandex NV
  • Tripadvisor Inc
  • Qihoo 360 Technology Co Ltd
  • Expedia Inc
  • Groupon Inc
  • Sina Corporation
  • Iac/Interactivecorp
  • Yelp Inc
  • Zillow Inc
  • Aol Inc
  • Zynga Inc
  • Homeaway Inc
  • Opentable Inc
  • Trulia Inc
  • Renren Inc
  • Internet Initiative Japan Inc. (ADR)
  • Angies List Inc
  • Bazaarvoice Inc
  • Move Inc
  • Icg Group Inc
  • Millennial Media Inc
  • Demand Media Inc
  • Brightcove Inc
  • Xo Group Inc
  • Meetme Inc
  • Autobytel Inc
  • Travelzoo Inc
  • CafePress Inc
  • Twitter
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