Public Internet Company Market Valuations

Investors were clearly focused on Internet category winners, awarding premium valuations to those that exceeded their high TTM revenue hurdle rate…

 

This excerpt is from our complimentary Q1 2012 Software Industry Financial Report which can be downloaded here:  http://www.softwareequity.com/research_reports.aspx

The median EV/Revenue multiple for the 87 public companies comprising the SEG Internet Index was 2.5x in 1Q12, the same as the prior quarter, but down 16.7% from 3.0x in 1Q11 (Figure 18).  The exception was Internet companies with revenues under $100 million which experienced strong YoY growth in market valuation – quite a contrast from their sub-$100 million software counterparts who couldn’t stimulate nearly as much investor enthusiasm (Figure 20).

Investors were clearly focused on Internet category winners, awarding premium valuations to those that exceeded their high TTM revenue hurdle rate, but largely ignoring the rest.  As testament, public Internet providers with TTM revenue growth rates between 30% and 40% had a relatively modest median EV/Revenue multiple of 2.6x, while those above 40% were awarded a whopping 6.7x multiple (Figure 21).

As in the case of SaaS, investors had no problem betting on unprofitable Internet investors that reported rapid growth and appeared to have extraordinary upside.  In 1Q12, Internet providers with negative EBITDA margins had a median TTM revenue growth rate of 67.4% and a whopping median EV/Revenue multiple of 6.6x (Figure 22).  The list of companies in this group include new IPOs Jive Software (-49.2% EBITDA margins, 13.3x EV/Revenue), Angie’s List (-47.3%, 8.2x), Zynga (-27.5%, 6.6x), Groupon (-13.7%, 7.0x) and Yelp (-9.3%, 16.3x).

But unlike SaaS investors who showed complete indifference to ranges of profitability (Figure 16), Internet investors rewarded profitable Internet providers as well.  Public Internet companies that were able to achieve EBITDA margins in excess of 40% in 1Q12 received a premium median market valuation of 5.8x, in contrast to those with 0% – 10% EBITDA margins that had a median 1.4x EV/Revenue multiple (Figure 22).

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