Public Internet Company Market Valuations

The following article is from Software Equity Group’s 2011 Q3 Software Equity Industry Report.  A complimentary copy of the quarterly report can be downloaded here: http://www.softwareequity.com/research_reports.aspx

The median EV/Revenue multiple for the 85 public companies comprising the SEG Internet Index was 2.6x in 3Q11, down 19% from the 3.2x posted in 2Q11.  The median 3Q11 Internet company EV/EBITDA multiple was 13.1x, down markedly from 18.1x in 2Q11 (Figure 16).  The second quarter of 2011 marks the fourth consecutive quarter the SEG Internet Index median EV/Revenue multiple has exceeded the SEG Software Index median EV/Revenue multiple.  While a similar phenomenon occurred in both 2Q08 and 2Q09, we believe this differential will continue and grow for the foreseeable future, as investors continue to shift their attention from public on-premise software companies to public Internet and SaaS providers.

Relative to their SaaS counterparts, however, Internet EV/Revenue valuations still lag far behind.  In 3Q11, the median market valuation of public Internet providers was 43% lower than public SaaS companies, despite being 73% more profitable (Figure 17).  As evidenced by the inverse relationship between EBITDA margin and EV/Revenue multiples, investors are clearly not focused on profitability.  Internet providers, currently spending a median 21% of all revenue on sales & marketing, might be better served by upping the sales & marketing ante to equal the median 33% of revenue spent by public SaaS providers.

Chinese based Internet companies, impacted by hints of a slowing Chinese economy and by accounting irregularities, saw their valuations plummet in 3Q11.  In 3Q11, the fourteencompanies in our SEG Internet Index with headquarters in China posted a median EV/Revenue multiple of 4.7x, down 37% from the 7.5x posted in 2Q11 (Figure 18).  Nevertheless, Chinese based companies still posted 96% higher median EV/Revenue multiples than the remaining 71 public companies in the SEG Internet Index that are trading at a median 2.4x EV/Revenue.

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